Sole Proprietorship vs. Corporation: Which Should You Choose?
So you have a business idea and you decided to form your own business. When you create a company, you can choose from two main types of entities: sole proprietorship and corporation. The one you choose will depend on factors such as the number of people in your company and the amount of liability and risk you are willing to take on.
Would you rather have less work and fewer expenses early on, or would you have rather have more financial protection down the road? Read on to learn about the pros and cons of both of these entities so you can make an informed decision.
Why Choose a Sole Proprietorship?
Sole proprietorships are the most common type of entity, and for good reason. They are inexpensive and easy to implement. You can create or end one very easily. Sole proprietorships are not monitored like corporations, which must follow many formalities.
In order to qualify for a sole proprietorship, you must own and operate your business by yourself. You can hire as many employees as you want to perform work for your company, but they cannot have any part of the ownership or daily operations.
As a sole proprietorship, you receive all of the profits. This may seem like the perfect situation, but the downside is that there is no separation between the company and yourself as an individual. What this means is that you get not only all the assets but all the debts as well. If your business loses money and goes deep into debt, you are responsible for paying back that debt. Your assets could be seized to pay creditors. The good news is that unlike a large corporation, you likely won’t have to deal with millions of dollars in debt.
Why Choose a Corporation?
Corporations are much more formal than sole proprietorships. They require legal documentation that must be filed with the state. They must also hold regular shareholder and director meetings and have a board of directors that approves business decisions.
Corporations can be time-consuming and costly to set up. Corporations have lower insurance costs than sole proprietorships, but the initial setup fees, taxes and annual fees more than make up for it. However, they offer some financial advantages. For example, a person and the company are considered separate entities. This means that if the company is in debt, the owners are not liable. Their personal assets are not affected.
Another possible advantage is that a corporation continues on even after the owners and shareholders have passed away. This means that the company can be passed on to family members. A sole proprietorship does not allow for this.
Learn More About Choosing an Entity for Your Business
Navigating the business world can be a challenge. It’s important to make the right decisions so you can poise your business for success. Get the advice you need on business law at Godfrey Legal. With more than three decades of experience, we can answer your questions and ensure your business is on the right track. Contact us at (407) 890-0023 today for a consultation.