Do you know a sole proprietorship cannot be formed with anyone else – not even a mouse, not even a spouse!

By Jill Kline, WSBDC Regional Director

A sole proprietorship, as the name implies, can have only one owner; if you involve your spouse or anyone else, the entity would then become a general partnership. 

When a sole proprietorship is formed, no business “entity” is actually created.  The assets and liabilities of the business are the same as those of the owner.  If you want to involve your husband or wife because you are worried about what would become of the business if something happens to you, then rest assured that the business would transfer to your heirs.  Your heirs could continue the business, restructure it, or dissolve it depending on what was appropriate for them.

Forming a sole proprietorship opens you up to unlimited personal liability since the business is the same as the owner both legally and financially (as does a general partnership).  A sole proprietorship has no separate taxation; the owner pays all taxes personally.  You might consider forming an S corporation or limited liability company in order to obtain the appropriate tax advantages you might be seeking, while limiting your liability.  I highly recommend you consult an attorney or accountant to help you determine which legal form of business would best suit your situation.

A general partnership in Wyoming does not require a written contract or agreement and has many of the same characteristics of a sole proprietorship.  Again, there is unlimited liability for each person involved; the partnership would dissolve upon the death or declared incompetence of a partner (unless there is a written contract or agreement stating otherwise); and each partner pays taxes on their share of income.  If you decide to form a general partnership with someone other than your spouse I would recommend involving an attorney.  This, at the very least, could help you avoid any deadlock decisions if the ownership of the partnership is split equally. 

The Wyoming Secretary of State has a document called “The Choice Is Yours” that can help educate you on which legal entity would be best for your business.  It is available at http://soswy.state.wy.us/corporat/pub.htm.

Comments

[Leonard Holler]

You are right Jill. The sole-proprietor is the only person legally responsible for the operation of the business and has financial responsibility for its obligations as well. However, did you know that you can have a sole-proprietorship where both husband and wife actively participate in the operations and you have a choice for "tax purposes" to consider the spouse as an employee (subject to payroll taxes, withholding, and potentially deductible benefits, etc.) or SPLIT the income similar to a partnership for self-employment tax purposes in some states? This may can impact the overall family tax liability and the credit given to each spouse for social security benefit determination. As the result of an IRS Letter Ruling, spouses were required to file a seperate Schedule SE, and report their respective share of income from the business where they both worked full-time.

[Jill Kline]

Yes, thanks for the tax clarification Leonard. For a little more information on husband and wife business ventures visit: http://www.irs.gov/businesses/small/article/0,,id=97732,00.html

[Joe]

I wonder if you can put all the personal assets in the name of one spouse and hold only the business assets in the name of the other. That way if the company gets sued only the companies assets may be attached since the owner doesn't have any personal assets that can be attached because they are all in the name of the spouse who has no interest and hence no liability in the business. Limited liability without the formality and expense of incorporation.