A common question asked amongst new entrepreneurs and business owners are: how many owners does a sole proprietorship have?
Well, according to the Small Business Administration, a sole proprietorship or sole trader is a business with only one owner. Since they are an unincorporated business, they will pay personal income tax on profits earned.
So, if a person starts a business as a single person without any further legal steps or registration, that business is a sole proprietorship. The lack of government regulation is the reason why a sole proprietorship is the most common type of business. Let's quickly review the definition of a sole proprietor.
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As the name suggests, business ownership is only one owner or person in a sole proprietorship. Sole proprietorship examples could be a freelance writer, graphic designer or an artist. Corporations on the other hand, can have multiple owners and hold shares of the business. Since there is no separate legal entity and only one owner, the business does not exist separately from the owner. If the owner dies, the business ceases to exist. Typically, the business operates under the legal name of the owner of a sole proprietorship unless the owner files a fictitious name or DBA ("doing business as"). A fictitious business name or trade name allows the business owner or sole proprietor to open a business checking account under the DBA.
There are many advantages and disadvantages of sole proprietorships. Let's review some of them.
The greatest benefit of sole proprietorships are the face that it would be super easy to set up as a form of business that requires no paperwork filing.
It is much cheaper to form a sole proprietorship and you have full business ownership or complete control of the operation.
Also, a sole proprietorship does not have to pay corporate taxes. There are no filing or associated fees when it comes to taxes. Sole proprietors only have to follow licensing, permit, local regulations, and zoning ordinances. Since sole proprietorships typically rely on their own income and bank loans to start or establish their business, this can lower start-up costs for small businesses.
One of the main disadvantages to being a sole proprietorship is that the owner is personally liable for any debts incurred by the business. Since sole proprietors have unlimited liability, their personal assets are at risk. You'll be entitled to all the profits, as well as responsible for handling all of the business's debts and liabilities incurred.
For example, if a sole proprietor is sued or in large debt, folks, as well as creditors, can go after both personal and business assets.
Again, this is due to the business owner and the personal identity being one. Many people start off with sole proprietorships and as they grow, restructure to business structures like Limited Liability Companies or corporations. Business owners are often attracted to a limited liability company as a business structure because they can have a separate business entity to avoid putting their personal assets at risk.
If a sole proprietor is ready to set up a separate business structure, then they'll file articles of incorporation with . a state agency.
You can discover more about how to change from a sole proprietorship to an LLC here.
An individual cannot be considered a sole proprietorship with multiple owners. However, if a husband and wife work in the business, it is legal to operate as a sole proprietorship. Usually, when two (or more) people want to form a business together, they will form a general partnership. Just like a sole proprietorship, this form of business does not require registration with the State. Partnerships can just start and operate when two or more people decide to do business together.
Many sole proprietorships and partnerships seek outside investors to grow their business. However, unlike a corporation, they cannot sell shares of the company.
A sole proprietorship has one owner who is personally liable for the company's debts. A partnership is formed when two or more persons pool their resources for the benefit of the company and share profits and losses.
Many sole proprietors ask when is the best time to switch from a sole proprietorship to an LLC. Simply put, in order to protect your personal assets, a good point to start an LLC is right away. A limited liability company or corporation can help protect your assets and avoid unlimited liability.
A drawback of having the corporate structure is the double taxation that shareholders face if the corporation pays out dividends. Here's how double taxation works. If a company pays income tax on its profits, shareholders would also pay taxes on the dividend income they receive from the profits distributed.
According to the Internal Revenue Service, a sole proprietor is not taxed separately from the business.
Always seek the advice of a law firm or lawyer for advice in regards to your specific situation or business.
There are ways you can protect yourself without forming limited liability companies or other business structures.
Just like a car or home insurance, you could purchase sole proprietorship or business insurance to protect your assets. So, even if you have an accident or are sued for negligence, your business insurance can cover settlements or legal fees up to the policy amount.
Look, accidents happen. General liability insurance can protect you from any accidents for damaged property and personal injury. If a mishap occurs, and the property gets damaged or someone gets hurt, you'll be able to claim insurance for coverage based on your policy.
Another option to avoid unlimited liability is to have your clients or folks you work with sign a liability waiver. Many websites or software have some sort of "Terms of Service" or a waiver to acknowledge any risks of content from their website. You could do the same for your businesses. A liability waiver can save you thousands of dollars if you take the proper precautions.
In summary, a sole proprietorship is an unincorporated business owned by one person. They own all of the profits and debts the company incurs. Because there are no other owners and no legal restrictions on ownership, the solitary proprietor is free to do whatever it takes to keep the business running. Limited liability companies can help take some of the risks of your personal assets being sought after if you are in any legal trouble.
A sole proprietorship is a business formed by a single or one person and acts as the only owner/operator. Because there are no other owners and no legal restrictions on ownership, the solitary proprietor is free to do whatever it takes to keep the business running. Alternatively, a corporation is influenced/exercised by the board of directors, over which the original owner has only partial control (even if he or she owns a controlling interest).
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?