Choosing the right legal structure for your business is crucial as it affects your liability, taxes, and ability to raise capital. This section provides an overview of the most common legal structures: Sole Proprietorship, Partnership, Limited Liability Company (LLC), Corporation, and Cooperative. Each structure has its own characteristics, advantages, and disadvantages, and it’s important to understand these before making a decision.
Sole Proprietorship
Definition and Characteristics
A sole proprietorship is the simplest and most common form of business structure. It is an unincorporated business owned and run by one individual, with no distinction between the business and the owner.
- Ownership: Single individual.
- Control: Owner has full control over business decisions.
- Liability: Owner is personally liable for all business debts and obligations.
- Taxation: Business income is reported on the owner’s personal tax return.
Pros and Cons
Pros:
- Easy and inexpensive to set up.
- Owner has complete control over the business.
- Simplified tax reporting.
Cons:
- Unlimited personal liability.
- Difficulty in raising capital.
- Business continuity is tied to the owner’s lifespan.
Real-World Examples
Example: Jane runs a small bakery as a sole proprietorship. She enjoys full control over her business operations but is also personally liable for any debts incurred by the bakery. When Jane decides to expand her business, she faces challenges in securing external funding because potential investors are hesitant to invest in a sole proprietorship.
