Write a letter advising a hypothetical sole proprietor to choose another form of business ownership. By definition, a sole proprietorship is an unincorporated business owned by one person known as the sole proprietor. The majority of U.S. businesses are owned and operated as sole proprietorships. Write a letter to a hypothetical sole proprietor explaining why he or she should convert the sole proprietorship to another form of business ownership (for example, a traditional "C" corporation, an "S" corporation, or a limited liability company).
When you write this letter, you should let the sole proprietor know that while establishing a sole propietorship costs nothing, this form of business does not provide legal advantages. If, on the other hand, the sole proprietor establishes an LLC, or limited liability company, he or she will only be liable for the amount he or she has invested into the business. In other words, as the owner of an LLC, he or she will not be personally liable for the business's losses. However, a sole proprietor can be held liable for the business's losses, and creditors can try to seize a sole proprietor's house, car, or other assets to reclaim losses.
In addition, an LLC can raise money more easily than a sole proprietorship can, as members of an LLC can sell membership interests in order to raise capital. An LLC can also more easily transfer ownership of a business to another party without disrupting the functioning of the business. On the other hand, a sole proprietor must sell each element of asset of the business separately, which is a far more cumbersome process.
Sole proprietors and sole members of an LLC must report their business income on their tax returns and keep track of their expenses. Therefore, the process of filing tax returns is similar for a sole proprietor and for the sole member of an LLC. While setting up an LLC costs about $1,000 and involves more paperwork than setting up a sole proprietorship does, the LLC can provide a great deal of protection for the member or members and is generally worth this one-time expense.