A sole proprietorship is an entity owned and operated by a single individual. This is often the simplest business formation option in Colorado, as there are no formal filing requirements. It is also the most often formed business operation. One has merely to register the name as a trade name if it is not the first and last name of the owner. There are, of course, some issues to be aware of if you choose to go the sole proprietor route instead of, say, the S Corp or even the LLC:
- The owner is personally liable for all of the business’ debts and liabilities. If a loan is involved, it will be the personal liability of the owner of the sole proprietorship, setting aside the issue of personal guarantee. If the owner is not able to meet his or her obligations on the loan, the bank may come after the owner’s personal assets (i.e. personal bank account, house, etc.)
- On the legal side, any lawsuit that may arise against the business is a lawsuit against the owner individually.
- From a tax perspective, federal, state, and local income taxes are calculated using the owner’s individual tax return. The sole proprietorship does not file its own taxes; all tax liability is that of the owner.
The sole proprietorship is similar in some ways to the single-member LLC which, rather than being a tradition multi-member or partnership LLC, is instead taxed as a sole proprietor, or as the IRS so sadly puts it, a “disregarded entity.” Except, the single-member LLC affords a bit of liability protection so the owner’s personal assets will not be seized for business debts. There is controversy around how much a single-member LLC treated as a pass-through entity may actually protect the owner’s assets. This is something you may need to discuss with your Colorado business attorney.
My Way or the Highway
There are advantages to forming a single person business as a sole proprietorship:
- No corporate tax
- As owner, you have complete control and decision-making power over the business
- The owner can buy, sell or transfer at their own discretion.
- Really, very few formal business requirements, aside from registering with the State of Colorado
As always, business formation in Colorado should be a well-thought out undertaking, and I would suggest consulting with a business attorney to choose the best option for your new business.
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“Solitary green tree on an empty island” under CC license by Horia Varlan