Starting a new business is the dream of entrepreneurs all across the United States. Prior to starting any type of business, potential business owners must work out a great number of details. Among all of the decisions that must be made, the most significant choice a business owner must make is selecting the legal structure of the business. A business owner's level of liability and control is directly related to the business structure and these factors vary greatly depending upon which form is selected. In order to choose the most suitable form for any business venture a person must first understand the key differences and characteristics of each business structure.
Throughout the years a number of different business structures have been developed which have been designed to meet the wide range of needs of businesses and business owners. Although several other business forms exist, the three primary business structures which are used in the United States are sole proprietorships, partnerships, and corporations. The main differences between these three business forms are the tax accounting methods, the amount of liability which is imposed on the business owner(s), the number of owners which are involved with the company, and the amount of control that is given to the owner(s).
A sole proprietorship, which is defined by having a single owner, is "the most common form of business in the United States" (Mallor, 893). The only requirement for a business to be a sole proprietorship is that it has only one owner. Compared to other business forms, this structure is the easiest and most inexpensive type to form. Sole proprietorships do not require any specific legal formalities, nor do they require any special fees. They are formed simply by default anytime an individual starts a business without specifying an alternate business form.
According to the law, sole proprietorships are not considered to be separate legal entities. The business itself has no individual existence, it is "merely an extension of its only owner, the sole proprietor" (Mallor, 892). A great amount of liability is assumed anytime a person starts a business as a sole proprietorship. All of the debts and obligations incurred by the business are considered to be the debts and obligations of the owner himself. "If the assets of the business are insufficient to pay the claims of creditors, the creditors may require the sole proprietor to pay the claims using his individual, nonbusiness assets such as money from his bank account and the proceeds from the sale of his house" (Mallor, 893).
Although the liability associated with sole proprietorships can be substantial, many business owners find that the benefits are worth the risk. A sole proprietorship provides the business owner with a great amount of control that is unlike any other business form....