Our weekly columns frequently focus on the virtues of formally organized business entities, such as limited partnerships, limited liability companies and corporations. However, the largest number of all entities in the United States don’t fall within any of these categories. They are either sole proprietorships or general partnerships. The sole proprietorship and general partnership are the default entities for those who have begun to conduct a business, provide a service, perform a trade or sell a product on their own, but have not elected another form of entity.

The sole proprietorship is truly a one man show. A sole proprietorship has one owner who is solely responsible for the activities of the business. A sole proprietor who takes on a co-owner has converted the business to a partnership, which will be discussed in detail next week.

In a sole proprietorship, all earnings are taxable to the owner and reportable as regular income on his personal tax return. No separate tax identification number is necessary and the sole proprietor may use his personal social security number for the tax identification number of the business. Sole proprietorships are the simplest form of entity as evidenced by the lack of formalities and flexibility from beginning to end. There are no formal filing requirements to start the business, although a trade license or sales tax permit may be required depending upon the activity in which the proprietor is engaged. The proprietor simply hangs his shingle and begins promoting his product or service.

The sole proprietor may trade on his own name or use a trade name. If a trade name is used, the owner should register it with the Oklahoma Secretary of State to ensure that the name selected is not already being used by another business in Oklahoma. If the owner desires to promote or conduct his business under more than one name, the same trade name report can be used to protect and secure additional names for the existing enterprise. A trade name report can be filed for a fee of Twenty-five Dollars. To determine the availability of the name you wish to use prior to filing for a trademark or trade name, contact the Oklahoma Secretary of State’s office. For an additional filing fee of Ten Dollars you can reserve any available name for a period of sixty days, until you file a registration for the trade name.

If the business owner wishes to take the protection of a name and/or logo one step further, he should apply for a trademark. Trademark Registration covers "any word, name, symbol, emblem, or device or any combination thereof adopted and used by a person to identify goods made or sold or services rendered and to distinguish them from goods made or services rendered by others." The filing fee is Fifty Dollars for registration of a trademark for a single class of goods or services. This will also help you confirm the name is not already in use, which might lead to confusion of potential customers and even liability for infringement of the trademark of another. The initial trademark is valid for a period of ten years, and may be renewed for successive five year intervals for a fee of Twenty-five Dollars.

From both the tax and legal perspectives, the identity of the sole proprietorship is the same as that of the individual proprietor. Unlike a partnership, corporation, or limited liability company, there is no bar to the commingling of personal and business assets. If the business is in need of capital funds, the owner may loan the money to the business or contribute it outright. The same would be true for the borrowing, use or lease of assets between the business owner and the business.

Consequently, an owner of a sole proprietorship is open to unlimited personal liability for the debts or other obligations incurred by the business. This liability is for the proprietor’s agents or employees’ negligence, torts or breaches of contract just to name a few. A creditor of the business is a creditor of the individual owner, meaning the owner’s personal assets and all other sources of income can be reached by business creditors. The converse is also true. The assets of the business are available to satisfy any personal claims or creditors of the owner. Because of the potentially limitless liability, many entrepreneurs begin as sole proprietors, then quickly convert to a business form that offers liability protection, such as a corporation, limited partnership or limited liability company. If the proprietor decides for one reason or another that he wishes to remain a sole proprietorship, one way to hedge against the potential liabilities of the business is thorough insurance.

Terminating a sole proprietorship is as easy as starting one. The owner may cease activities or sell all assets of the business at any time. The business is not transferable as a going concern, but the owner may transfer some or all of the business assets, which may include the trademark and any trade names. The duration of a sole proprietorship is limited to the lifetime of the individual owner because of the unity of identity between the owner and the business. This means the sole proprietorship dies with the owner.

Although the simplicity of startup and the complete lack of operational formalities may appeal to the person who has recently hung out a shingle, many business owners quickly realize they need liability protection both for their business enterprise and for their personal assets. At this point, the sole proprietorship can be converted into an entity that provides the desired liability protection, such as a single member limited liability company or wholly owned corporation. These entities have quite different organizational and operational requirements, many of which have been discussed in prior articles archived on our website at www.brownlaw-ok.com.

If you have questions regarding an existing or new sole proprietorship or conversion of your current sole proprietorship to another form of entity, be sure to consult with an attorney knowledgeable in business transactional law. Tune in next week for more about informal business enterprises.

© Jerry E. Shiles 2004

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