At some point everyone who wishes to open a business asks him/herself about what type of business ownerships should be used for the business. This is a very broad and common question that many small business owners and individuals who think about opening a business hesitate about. Fairly it is a very good question to start your business from. As you develop your company or organization you want to make sure you set up things that you are responsible for and things that you are liable for. There is a primer difference in owning the company and being liable for company’s liabilities and assets. Let’s start by defining what is Sole Proprietorship and Incorporation.
A sole proprietorship (also identified as the sole trader or proprietorship) is defined as a type of business unit that is owned and operated by one individual (owner, founder) and in which there is no legal distinction between the owner and the business. It is important to mention that the owner is fully responsible for all business activities and in the case of any legal dispute with the business; owner will be counted as a business. The owner is entitled to receive all the profits that are made and has unlimited liability for all the losses and debts. Very important to know that all assets owned by the business owner as well as all debts of the business are the proprietor’s responsibility. In other words it means that the business owner and his/her business are acting as the same individual instead of separate entities. A sole proprietor is allowed to utilize a trade name or business name other than personal legal given name. In addition, if the business is owned and operated by the partnership and is not incorporated it means that all the liability is equally divided in between the partners, unless there is a contract stating split share in the ownership.
Incorporation (Inc.) means forming of a new entity (corporation) which is described as a corporation which is being a legal entity that is recognized as a person under the law. The main difference between the Sole Proprietorship and Incorporation that in sole prop owner is liable for all the business actions where corporation (incorporated) stands as a separate entity from the business owner/owners and operators. Corporation may also be any type of the organizations starting from business, a non-profit organization, sports club, and/or other entities.
Incorporation gives you an ability to protect your personal assets. One of the biggest benefits and most important legal advantages is the protection of the personal belongings and assets against the claims of creditors and lawsuits.
Usually, majority of small businesses prefer not to incorporate their business, until they grow bigger in the amount of customers, revenue and employee size. This gives flexibility, because when you don’t have a lot of staff members and your clientele is not that big that you don’t know your customer you can keep up with everything that is going on in the company. However, with the growth business expects different volumes of customers and profit amounts therefore it is rational to incorporate the business to avoid personal liability for some of your staff errors and faults.
It is also important to know that while sole proprietorship doesn’t cost you a lot, you’ll only need to register your business, incorporating a company might cost at least 4-5 times the price of registering the sole proprietorship. Also, it depends on different variables such as the amount of assets, employee size and etc.