Andy wants to start his own business. He has decided to rent space in a "strip mall" and open a pet shop. Additionally, he will provide dog grooming services. He figures he can do almost everything himself, though he will need to hire a part-time

Question

employee on an "as needed" basis. His friend, Lacy, has agreed to work when needed. Andy is considering operating his business as a sole proprietorship. What are the primary legal advantages and disadvantages to this form of business ownership for Andy's pet shop?

Answer 1

There are many advantages to operating the pet shop as a sole proprietorship. There are no formal procedures required to create a this type of business ownership. Though he may be required by local or state law to obtain a particular license, a retail sales tax number, etc., such requirements would exist no matter what form of business ownership he selected. A proprietorship is not regarded as a separate tax entity, so Andy can report his earnings and expenses on his individual income tax return (using Schedule C). Thus, he is not subject to double taxation as is the corporate business. Additionally, as a small business, he is exempted from a great deal of statutory law that applies to larger businesses. For example, he is not subject to Title VII of the Civil Rights Act which only applies to companies with 15 or more employees, nor is he subject to the Family and Medical Leave Act which applies to companies with 50 or more employees.

Certainly, Andy faces some serious disadvantages as a sole proprietor. He is personally liable for any debts or claims made against the company or his employees. As a proprietor, he will have a difficult time raising capital, since the money can only come from savings or loans. If the business is a failure, he may wind up losing all his savings and have serious debt obligations that could drive him into bankruptcy. Also, since he is sole proprietor, he has no one else to share the potential liability in the event of a claim not covered by insurance.