Sole Proprietorship

Stefanie Luz Jamoner-Chiu

Agency Trust Partnership

Friday 6pm-9pm

Atty. Gimena

December 12, 2019

 Introduction
A business that legally has no separate existence from its owner. Income and
losses are taxed on the individual's personal income tax return.

It’s the simplest type of business—the sole proprietorship, a default classification

for a business operated by someone who has decided not to form an official entity.
If you know someone selling crafts on Shoppee.com, for example, they are
operating a sole proprietorship, if they have not formed an official company.

The sole proprietorship is a popular business form due to its simplicity, ease of
setup, and nominal cost. A sole proprietor need only register his or her name and
secure local licenses, and the sole proprietor is ready for business. A distinct
disadvantage, however, is that the owner of a sole proprietorship remains
personally liable for all the business's debts. So, if a sole proprietor business runs
into financial trouble, creditors can bring lawsuits against the business owner. If
such suits are successful, the owner will have to pay the business debts with his or
her own money.
 Background

The sole proprietorship is a popular business form due to its simplicity, ease of
setup, and nominal cost. A sole proprietor need only register his or her name and
secure local licenses, and the sole proprietor is ready for business. A distinct
disadvantage, however, is that the owner of a sole proprietorship remains
personally liable for all the business's debts. So, if a sole proprietor business runs
into financial trouble, creditors can bring lawsuits against the business owner. If
such suits are successful, the owner will have to pay the business debts with his or
her own money.

The owner of a sole proprietorship typically signs contracts in his or her own
name, because the sole proprietorship has no separate identity under the law. The
sole proprietor owner will typically have customers write checks in the owner's
name, even if the business uses a fictitious name. Sole proprietor owners can, and
often do, commingle personal and business property and funds, something that
partnerships, LLCs and corporations cannot do. Sole proprietorships often have
their bank accounts in the name of the owner. Sole proprietors need not observe
formalities such as voting and meetings associated with the more complex business
forms. Sole proprietorships can bring lawsuits (and can be sued) using the name of
the sole proprietor owner. Many businesses begin as sole proprietorships and
graduate to more complex business forms as the business develops.

Because a sole proprietorship is indistinguishable from its owner, sole

proprietorship taxation is quite simple. The income earned by a sole proprietorship
is income earned by its owner.

Sole proprietors are personally liable for all debts of a sole proprietorship business.
Let's examine this more closely because the potential liability can be alarming.
Assume that a sole proprietor borrows money to operate but the business loses its
major customer, goes out of business, and is unable to repay the loan. The sole
proprietor is liable for the amount of the loan, which can potentially consume all
her personal assets.

Sure, there are no filing fees, and no requirements like licenses or insurance, but
the sole proprietorship is deceptive and has hidden costs and complications.

Four Hidden Costs of the Sole Proprietorship:

1. Unlimited personal liability

This means you are personally liable for all debts of the company. This is the
greatest risk of a sole proprietorship. Without having a separate entity for your tax
and legal issues, a court is likely to see all of your assets and liabilities, including
personal, non-business-related items, as a single group.

If you became the target of a lawsuit, a judge could easily rule that your personal
assets and bank accounts be used to pay damages incurred as a result of your
business activities. If you have outstanding tax obligations, the IRS or other
agencies may pursue you, personally, rather than your business.

2. Difficulty in raising investment capital

It’s much more difficult to sell ownership in an LLC than in a corporation. And for
a sole proprietorship, it’s basically impossible.

3. Difficulty in getting a business loan or line of credit

As a sole proprietor, you’ll have to rely mainly on friends and family who already
know and trust you. It is extremely unlikely you’ll find a venture capitalist willing
to write a check to invest in a business that has no formal company encompassing
it.

Similarly, credit lenders will not be eager to extend a line of credit to an individual
for a business operation without a business entity.

4. No business write-offs

Business write-offs lower the amount of taxable income you have at tax time, and
this reduces the amount of tax you owe. Here is how it works: deduct the costs of
running your business from your income. Make sure you have records to support
your claims to the IRS and that the costs are ordinary and necessary. This is the
way to benefit doubly, when you invest in your business. Electing not to do this
may cost you a lot of money.
 Discussion

Sole proprietors are personally liable for all debts of a sole proprietorship business.
It is a reality that the potential liability can be alarming. Assume that a sole
proprietor borrows money to operate but the business loses its major customer,
goes out of business, and is unable to repay the loan. The sole proprietor is liable
for the amount of the loan, which can potentially consume all her personal assets.

Imagine an even worse scenario: The sole proprietor (or even one her employees)
is involved in a business-related accident in which someone is injured or killed.
The resulting negligence case can be brought against the sole proprietor owner and
against her personal assets, such as her bank account, her retirement accounts, and
even her home.

Consider the preceding paragraphs carefully before selecting a sole proprietorship

as your business form. Accidents do happen, and businesses go out of business all
the time. Any sole proprietorship that suffers such an unfortunate circumstance is
likely to quickly become a nightmare for its owner.

If a sole proprietor is wronged by another party, he can bring a lawsuit in his own
name. Conversely, if a corporation or LLC is wronged by another party, the entity
must bring its claim under the name of the company.

Being self-employed in a sole proprietorship can seem like being stranded on a

deserted island. It often means having no employees or partners to discuss business
issues, explore new ideas, or interact with on a social basis. There are other
significant downsides too.

No Legal Separation
As mentioned above, with a sole proprietorship there is no legal separation
between you and the business. This means that if the business fails and incurs debts
your personal assets—including your home and any other assets registered in your
name—could be seized to discharge the liabilities (which can be unlimited).
Likewise, if you are sued for damages caused by accident or negligence in the
course of your business activities, your personal assets can also be seized.
Exposure to Liability

If your business activities could expose you to substantial liability a sole

proprietorship is probably not a suitable form of business. With an incorporated
business or partnership, the personal assets of the owner(s) are separate from the
assets of the business and as such are protected from seizure for debt obligations or
liability. As with all forms of business, having sufficient business insurance is very
important.

Business Income Reports as Regular Income

While tax simplicity can be an advantage for sole proprietorships, it can also be a
disadvantage in terms of flexibility, as all business income must be reported as
regular income in the year in which it was earned. Incorporated companies have
much more flexibility in terms of how and when the owners are paid.

Difficult Getting Contracts

Some businesses, government agencies, consulting groups, etc. will not deal with
unincorporated businesses, either because they view a sole proprietorship as not
having the same level of legitimacy and professionalism as an incorporated
business, or that hiring a sole proprietor increases the risk of the tax authorities
treating the person as an employee rather than an independent contractor.

Harder to Raise Capital

Raising capital is more difficult for sole proprietorships. Incorporated companies

can raise equity financing from angel investors or venture capitalists by selling
shares in the business.

Difficult to Sell the Business

Sole proprietorships can be difficult to sell as the business is completely tied to the
owner. Since there is no distinction between the assets of the owner and the assets
of the business, the proper valuation of the business can be hard to achieve. Death
of a long-term illness of the owner can render the business worthless. Customer
loyalty resides with the original owner of the business and may not readily transfer
to a new owner.

Unless the sole proprietor has friends or family members who can carry on running
the business, illness or injury can affect business continuity. Depending on the
workload, it can also be more difficult to get time off for vacations or family
issues.
 Conclusion
With just one person at the helm, a sole proprietorship is easy to set up and
manage. However, that also makes the business and your personal assets more
vulnerable. Knowing the risks in advance can help you plan and take steps to
protect yourself.

This can be very risky, particularly in industries where injuries are more common.
For example, say you have a landscaping company and mow customers’ lawns. If
someone trips on your lawn mower and injures themselves, they could very well
sue your business for their medical costs. Since you’re a sole proprietor, the court
could allow a successful claimant to go after your personal assets to get their
money. Had you started an LLC or corporation, only your business assets would be
on the line.

Sole proprietors wear many different hats when running a business. Of course, you
can hire employees or independent contractors to help, but the reality is that many
sole proprietorships don’t have extra hands to help out.

Sole proprietors have to take care of marketing, advertising, finances, strategy, and
leadership—and everything else that comes with running a business. Doing too
much on your own can lead to serious burnout and cause the business to fail.
 Recommendations
After weighing the pros and cons, you might be drawn to the simplicity of sole
proprietorships and decide that this business form is the right choice for you. Here
are a few ways to take advantage of everything that a sole proprietorship has to
offer and minimize the disadvantages.

1. Open a business bank account.

Sole proprietors can establish some separation between themselves and the
business by opening a business bank account. The key to remember: Only use this
account for business deposits and withdrawals. Maintaining a separate business
bank account will enable you to easily identify streams of business income and
losses for tax returns and bookkeeping.

There are plenty of business bank accounts that require low minimum balances and
allow you to make dozens of deposits and withdrawals for free each month.

2. Get a business credit card.

A business credit card is another great tool for separating business expenses.
Again, the key here is to use the card only for business expenses, nothing personal.
Business credit cards are a great alternative to loans because specific cards offer
different credit limits, rewards points on purchases, and introductory 0% interest
rates. And you can choose the one that’s most advantageous to your business as a
sole prop. While the introductory rate is in effect, you can basically borrow money
interest-free.

3. Purchase business insurance.

Sole proprietors face more legal risks compared to corporations and LLCs, but
buying business insurance can significantly lower your risk. There are several
types of business insurance that you can purchase. General liability insurance
covers the cost of damage to your business’s premises, equipment, or products.
Product insurance covers damage ensuing from defective products. And home-
based business insurance is available for sole proprietors who work out of their
homes.
4. Draft clear contracts with your clients.

Contractual disputes between businesses or between employees and employers are

common. Lawsuits can be very debilitating for any company but especially for sole
proprietors because your personal assets are completely on the line. One of the best
ways to guard yourself is by drafting clear contracts whenever you do business
with a supplier, vendor, or other third party.
 Name: Stefanie Luz Jamoner-Chiu
Email: Stefanieluzchiu@yahoo.com.ph
Mobile: 0917134061

Personal Information

Birthdate: May 21. 1988

Address: 802 Senta Townhomes, Gothong Rd., Subangdaku, Mandaue City, Cebu
Civil Status: Married
Employer: OptumRx

Educational Background

Name of School School Year

Preschool La-Salle University Ozamiz City 1995-1997
Primary Education La-Salle University Ozamiz City 1997-2001
Secondary Education La-Salle University Ozamiz City 2001-2005
Tertiary Education Misamis University – Registered Nurse 2005-2009

Employment History

Company Position Year

Sykes Asia Customer Service Representative 2010-2013

Convergys Philippines Process Trainer 2013-2015
EXL Philippines Communication Trainer 2015-2016
Optum Rx Senior Operational Trainer 2016-Present

Certifications

 Lean Six Sigma

 Green Belt Six Sigma
 Manager Alpha Leadership Training