Business Structures - Sole Proprietorship

By: Michael Gallagher, District Director
North Dakota District Office

We started this series by briefly describing the factors an owner must consider when choosing a business structure: complexity, liability, number of owners, capital, taxation and survivorship. Let’s evaluate the sole proprietorship structure based on these specific factors.

Complexity
The sole proprietorship is the least complex and least expensive structure to set up. You can simply hang a sign out that says you are in business. However, once you have chosen your name, you may need to register it with the Secretary of State. If the business name is something other than your own name, then you need to file a trade name registration. For example, “Mike’s Cafe” does not identify the business as belonging to this particular Mike. The name should be registered with the North Dakota Secretary of State. This site also provides information on special licensing requirements, such as contractor’s licenses.  Please remember, however, that registering your business name with the Secretary of State does not protect the name from use outside the state.  If you wish to protect your business name on a national level you may wish to apply for a Trademark.

Liability
The second factor is liability. Simply put, as you are the business, you are personally liable for everything the business does. Both your business and personal assets may be at risk.

Number of owners
Trick question, how many owners can a sole proprietorship have? One . . . or two? Actually, there can be two owners provided they are legally married and file a joint tax return. Otherwise, only one person can be an owner.

Capital
The ability to raise capital is limited to your personal net worth and your good name. You can put cash in or use collateral, like your home, equipment  or other assets for a loan.

Taxation
The sole proprietorship files an annual tax return with your personal tax return. A Schedule C is used to figure the sales, expenses and taxable income. As the owner, you pick up the income on your personal tax return and pay applicable taxes. You can obtain the Schedule C form at the IRS website.

Survivorship
Since you are the business, a sole proprietorship dies upon the death of the owner. The assets of the business can be distributed under the terms of your will, and the business can continue to operate. However, it legally ceases to exist and becomes a different sole proprietorship with a different identifying number.

Remember, there are personal factors that will impact your decision as well, such as business goals, control, skills, cost, and family commitment.

The next article will discuss partnerships.


Mike Gallagher, District DirectorMike Gallagher joined the U.S. Small Business Administration in 1984 as a Business Development Specialist.  He was chosen as the Deputy District Director in 2005 and the District Director in November 2013.  A graduate of the University of North Dakota, Mike is a Certified Public Accountant and a former business owner.  He can be reached at michael.gallagher@sba.gov.

 

Other Business Structure Articles from the North Dakota District Office

How Do I Choose a Business Structure?

The Ins and Outs of Business Partnerships