By: Alex S. Halbach

Each and every day, entrepreneurs and inventors take a leap of faith and become small business owners. These entrepreneurs and inventors start with an idea in hopes of cultivating and nurturing that idea into a rewarding, and hopefully profitable, business venture.

Oftentimes, the owners of these small businesses become engrossed in marketing, financing, pricing, product development and other important aspects of the business and forget about the necessity of protecting themselves and their personal assets from liability by carefully and consciously selecting the business entity that best suits their respective needs.

A sole proprietorship consists simply of the business owner - there is no separate legal entity representing the business. For obvious reasons, it is an easy and straight-forward way to operate, as it does not require any licenses to maintain or annual reports to file, and the sole proprietorship begins the minute the first sale is made.

As a sole proprietorship, the owner enjoys complete control to operate the business as he or she chooses. The owner does not answer to directors, shareholders, business partners or co-owners, and because there is no separate entity, the owner of a sole proprietorship does not file a separate tax return. He or she simply completes a Schedule C reporting the business income and expenses, and any resulting profits are taxed on the owner’s personal income tax return at the personal tax rate.

Sounds pretty simple, right?

However, sole proprietors beware. Included below are a few of the disadvantages to operating a sole proprietorship, the largest of which is that the owner’s personal finances and business finances are one in the same. Regardless of whether or not a separate bank account has been setup and separate business records are maintained, choosing to operate as a sole proprietorship exposes the owner to limitless personal and financial liability.

The important thing to keep in mind is that there is no legal distinction between the owner of a sole proprietorship and the business itself – they are one in the same. This remains true even if the obligations of the business, whether financial or otherwise, are in the name of the business or if the physical location of the business is separate and apart from the owner’s residence.

It is also important to know that under South Dakota law, if a small business owner operates as a sole proprietorship and the business name does not include the last name of the business owner, that owner is required to file a fictitious name statement (or d/b/a) with the Secretary of State. Contrary to popular belief, filing a fictitious name statement does not provide the owner of a sole proprietorship with insulation from liability.

The alternatives to operating a sole proprietorship are many, and include limited liability companies, corporations, s-corporations and other business entities. Because of the individual complexities and intricacies of your business operation, there are no clear-cut answers. Before you make any decision about business structure or form a business entity, it is always wise to check with an attorney and your accountant.

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