Whether it’s deciding what product to sell, how to secure financing, or when to go to market, the small business owner has a litany of decisions to make. One of the most daunting choices facing the small business owner is that of deciding on the legal structure of their business (referred to as a “business entity”). Given that the law naturally assigns a business entity based upon the facts and circumstances surrounding the nature of the business, though, the small business owner would be wise to ask the question, “do I need to choose a business entity at all?”

Sole Proprietorship

Let’s suppose, for example, that you decide to open an eBay store selling bluetooth headsets. Simply by opening up your shop, the law treats your business as a “sole proprietorship.” The consequences of this categorization are two-fold. First, you (and you alone) will be solely responsible for paying any taxes resulting from income generated by your eBay store. Second, you (and you alone) will be solely responsible for any liability resulting from the use of your headsets.

Partnership

Just as the sole proprietorship is the default legal structure for the “one-man shop”, a “partnership” is the legal entity which naturally arises when two or more people engage in business for a profit. If you and your best friend decide to open an eBay store selling bluetooth headsets, then you will both be responsible for paying any taxes resulting from income generated by the eBay store. You and your best friend will also be personally responsible for any liability resulting from the use of your headsets.

Conclusion

As you can see, the law doesn’t require much in order to characterize your business as a sole proprietorship or a partnership. Is being deemed a sole proprietorship or partnership a bad thing? Not if personal liability isn’t of concern; that is, the nature of your business is such that it’s unlikely you’ll be sued and you don’t plan on borrowing a significant amount of money to get your business up and running. If, on the other hand, you’re interested in insulating yourself from liability, it’s probably best to consider incorporating your business or forming a limited liability entity.