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
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?
There are many advantages to operating the pet shop as a sole proprietorship. Besides the advantage of "being your own boss," there are no formal procedures required to create a this type of business ownership. A sole proprietorship is a flow-through tax entity which means that, although Andy must pay personal income tax on any profit he earns, the business itself does not pay income taxes. The business is not even required to file a separate tax return.
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 the owner of a sole proprietorship, Andy will have limited options for financing his business. Debt is generally his only source of working capital because he has no stock or memberships to sell. For this reason, sole proprietorships work best for small
businesses without large capital needs.
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