To close out my series on business entities, here is a brief look at sole proprietorships and partnerships.
A “Sole Proprietorship” is not really a business entity; rather, it’s just a way of saying that a person is conducting business under their own name, with personal ownership of the assets of the business. If your proposed business or idea will have only one owner, no investors and is, at least for the moment, not prone to creating liabilities, or if the owner does not have a particular need to protect assets, then a sole proprietorship is the easiest and least costly way of launching an enterprise. There is no need for filings or annual fees or franchise tax, and no need to follow corporate formalities (though there may be some registrations and licenses that are needed for a person to go about creating a business in his or her own name, for example a “Doing Business As” or DBA filing if you would like to use a fictitious business name).
Sometimes it makes sense for entrepreneurs to start their businesses as sole proprietorships and then incorporate later, and contribute the assets of the business to the corporation at that time. Whether and how you should do that is highly dependent on your business and tax situation.
Generally speaking, a partnership is probably not an ideal choice for organizing a start-up business, except in very particular circumstances or as part of a complex ownership structure, because it does not provide protection from liability for the general partners.
A partnership is exactly that: a partnership between one or more persons that co-own a business. Each partner can be either a general partner, who has rights to management of the business (and has unlimited liability for the business, including the acts of other general partners), or limited partners (basically investors), who may not manage the business, but who’s liability is limited to the money they have invested in the partnership.
One thing to consider is that persons who are co-owning or co-managing a business where no entity has been formed may, by default, have formed a partnership, even though no paperwork has been filed. This can potentially create large liabilities for the partners, so if there is more than one person involved in creating a new business, you should form an entity as soon as practicable.