Key Differences Between a Sole Proprietor and a Business

A business is defined by Wikipedia as a company or organized entity involved in commercial, financial, or occupational activities for profit. Companies can be either for-profit or non-profitable organizations that conduct business to meet a social purpose or further an ideal social cause. In the United States, business enterprises are incorporated as legal bodies but most have also been categorized as partnerships. Private individuals are not formally registered as partners in a partnership unless they take a majority share in the ownership of the business.

Most privately held businesses in the United States are technically sole proprietorships. A corporation may be a separate entity from its owners and one that exist solely to carry on the business. Limited liability companies (LLCs) are corporations which carry on the business but are protected from personal liabilities by a third party. There are key takeaways to keeping all these in mind when forming your business entity.

For-Profit Companies: To keep a clear and present example, let’s look at some key differences between a sole proprietorship and a corporation. A sole proprietor, in most cases, cannot lose his investment because he is the sole owner and has no legal rights or obligations to anyone. He may, however, be held personally liable if someone dies due to negligence on his part. On the other hand, corporations enjoy certain rights that sole proprietors do not: they can maintain directorships, shareholders’ meetings, and so on. A main article to note about corporations is that their protection from personal liability is a very important component of commercial law.

Limited Liability Companies: Similarly, limited liability corporations give the general public a limited liability protection. The main point here is that the company itself has no legal rights or obligations to its stockholders or creditors and its assets and liabilities are those of the investors or owners. The only protection that business entities have from the law is that their owners cannot be held personally liable for the actions or debts of the corporation. A main article to note is that most businesses run as businesses without any special consideration and they therefore do not benefit from the protections that limited liability companies provide. For this reason, it is extremely important to keep all these aspects in mind when you set up your business entity.

Shareholders’ Meetings: One of the key differences between corporations and sole proprietors is that while the former are restricted to a specific number of shareholders, the latter are permitted to meet regularly to discuss business issues and make decisions for the benefit of the entire entity. As an example, shareholders can determine the amount of capital required to operate the company and can also approve the annual budget. In addition, if a shareholder is injured or dies during the course of business operations, the assets of the entity are protected and can be recovered by the shareholders.

Limited Liability Company: A another option that most small business owners prefer is to set up a limited liability company, also known as an LLC. An LLC is an individual entity that has all the same corporate advantages of a corporation without having to take on the extra cost of corporate taxes and other liabilities. Apart from this, LLCs are also very easy to set up, run and maintain, as well as being highly flexible and mobile. On the downside, unlike a corporation, the general public does not have any rights to the profits made by the LLCs, although these profits will be taxed accordingly.