Sole Proprietorships & Partnerships

If you don’t want to spend the time and money involved in forming and running your business as a corporation, you can easily set it up as a “sole proprietorship,” provided you are the only owner. You don’t need to file many legal documents or to establish a separate tax paying identity in order to start the business. You just establish and operate the business for yourself.

On the other hand, if you are going into business with one or more other people, you might choose a partnership as the legal structure for your business.

There are some things listed below that you should do when you operate as a sole proprietorship. And, if you form a partnership, you need to do the following:

  • Select a business name and find out if it is available;
  • File a fictitious business name certificate with your county clerk’s office;
  • Obtain any licenses, permits, and zoning clearance required for your business and/or business location;
  • Get an Employer Identification Number (EIN) from the IRS;
  • Open a business bank account, using your fictitious business name and EIN;
  • Obtain general liability insurance covering your business and business property;
  • Report and pay taxes.
  • If you hire an employee, you must obtain workers’ compensation insurance and unemployment insurance.

If you choose to operate your business as a sole proprietorship, under most laws, you and your business will be treated as one and the same thing. This means that you would be personally responsible for any business debts or losses, unpaid taxes or failing to maintain insurance coverages. You can be sued personally for mistakes your unincorporated business makes or accidents it causes. It also means that you would report any business income and business losses on your personal tax return.

In a general partnership, each partner pays taxes on his or her share of the business income on personal tax returns. General partners are each personally responsible for the entire amount of business debts and claims against the partnership. A general partner can be sued for any mistakes made or accidents caused by any partner or employee while engaged in partnership business.

A sole proprietorship or partnership makes sense if you are not too concerned about personal liability, either because you will not be borrowing much money to run the business or you are not likely to be sued, because your business operations are unlikely to cause accidents or costly mistakes. In any event, you may want to consider purchasing liability insurance to have a peace of mind.

Limited Partnerships

Limited partnerships are different from general partnerships. With limited partnerships, there is a general partner that controls the day-to-day operations of the business and is personally liable for any business debts. The limited partnership also has one or more limited partners, who are usually just investors. If you are a limited partner, you will have limited control over the business, but you will not be personally liable for debts of the business. Limited partnerships are usually more expensive to set up and can be more complicated to run.

Legal Editor: Dan Brecher, November 2014 (updated February, 2016)

Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.

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