A frequent issue that entrepreneurs face – and one they should seriously consider – is whether to create a formal legal entity, such as a limited liability company (L.L.C.), or remain a “sole proprietor.” This post briefly identifies some of the common advantages and disadvantages of operating a business in Iowa as a sole proprietor.
A sole proprietorship is often referred to as one of the easiest and simplest business structures to create and operate. Sole proprietorships are run by one person and generally there is no “legal distinction” between the business and the individual owner. As depicted in the infograph to the right, some of the advantages include:
1. Sole proprietorships are very easy and inexpensive to create. Indeed, unlike a limited liability company (L.L.C.) or a corporation (Inc.), a sole proprietor is not required to pay fees to the State of Iowa for filing articles of incorporation, certificates of organization, or biannual reports;
2. A sole proprietor exercises complete control over the business and does not answer to other owners, such as shareholders in a corporation or partners in a partnership; and
3. A sole proprietorship generally has one of the lowest tax rates of all business forms.
While carrying on business as a sole proprietor certainly has advantages, many drawbacks exist that, for some, far outweigh the advantages. Some disadvantages include:
1. Sole proprietors are personally liable for business debts and obligations, including any liabilities arising from a lawsuit involving the business. As a result, if the “business” is assessed a fine or has a judgment entered against it, that fine, judgement, or other monetary obligation is, in reality, an obligation the sole proprietor may be required to pay out of personal funds;
2. Sole proprietors find it difficult to raise capital (i.e. funds from investors) because, as referenced above, there is generally no distinction between the business and the individual – a blurred environment that investors shy away from; and
3. A sole proprietorship has a “limited life” as it ceases to exist when the sole proprietor dies. In other words, unlike corporations where the corporation will long survive the death of its founders, a sole proprietorship ceases to exist the moment its founder dies. This issue is frequently a consideration for succession, estate, and retirement planning.
If you are an entrepreneur considering starting a new Iowa business or are currently running a sole proprietorship and are looking to avoid personal liability, evade the problem of “limited life,” or hope to seek investor money, you should consider contacting a licensed attorney.
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