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How Do I Decide between a Sole Proprietorship or Corporation?

By Felicia Dye
Updated: May 17, 2024

Before attempting to choose between a sole proprietorship or corporation, you need to have a good understanding of each business form and the impact that it will have on your plans. Consider the costs and the financial liability that you will face if you select one business type over the other. Also consider the amount of government involvement that you want to be subjected to. For the best results, you should speak with a professional before acting on your decision.

When comparing a sole proprietorship and a corporation, you may want to consider the associated costs. If your business is fairly new, a sole proprietorship may be the best option. Incorporating a business generally requires a larger financial investment.

As you are considering money, you may also want to think about financial protection. Since a corporation becomes a legal entity, you will not be held liable for its debts or any damages awarded in lawsuits. With a sole proprietorship, you are responsible for the financial obligations of your business. This means that if your business owes money, you may be required to handle the debt with resources that are not even related to the business.

In addition to needing more money, the establishment of a corporation also involves meeting more requirements. These requirements can vary from one jurisdiction to another, but one common example is the need to involve other people. A corporation is not a single person entity, so you may need to select officers or a board of directors. You will also likely be required to draft and file certain documents with the appropriate authority, such as one commonly referred to as the Articles of Incorporation.

The choice between a sole proprietorship or corporation may also be based on the amount of government regulation that you want to be subjected to when operating your business. The government is generally much more involved in the operations of corporations. Your company will likely be required to produce stock information, maintain certain types of corporate records, and file annual reports. There may also be a larger number of regulations regarding the steps that must be taken before certain business decisions are made.

If you plan for your business to remain fairly small and you do not intend to sell it or to seek partners, a sole proprietorship may be ideal. If, however, you foresee massive expansion, you may want to consider opting for a corporation. It is often difficult and it may be costly to try to upgrade from a sole proprietorship to a corporation at a later date.

It is very important that you understand that the decision between a sole proprietorship or corporation is a serious one. Avoid making your decision based on basic information or unqualified opinions. The decision should be well thought out after you are educated on the differences between the two business forms. Before you begin the process to establish your company as a sole proprietorship or corporation, it is highly advisable that you speak with business adviser or financial professional who is qualified to answer any remaining questions that you have and who can offer you sound advice about your plans.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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