Selecting the legal structure of a business is one of the first and most important decisions that a new business owner can make. It can dictate the number of owners in the business, the level of formality of the organization and has many important tax consequences. The simplest form of business is the sole proprietorship since it does not involve multiple owners, has simple tax treatment and does not require formal state filings prior to start-up like a corporation or limited liability company. Solo practices in various professions are not restricted to a specific form of business structure; the term solo practice simply indicates that there is a single professional in the practice.
A sole proprietorship is the most basic type of business organizational structure. In comparison to other types of business ownership structures, such as corporations, partnerships or LLCs, it has a simple and informal structure. Sole proprietorships have only one owner and do not involve any partners or outside shareholders. Also, unlike more complex business structures, the sole proprietorship does not typically require state-mandated filing of documents or the preparation of separate income tax returns because the income is attributed directly to the individual owner.
A solo practice simply means that a person is running a business by himself. Although, at a glance, the term may seem similar to sole proprietorship, it does not denote any particular type of business structure. Solo practices are common for professions such as law, medicine and accounting in which the business is referred to as a professional practice. Small businesses in other industries are not precluded from being operated by a single person, but due to the professional connotation of the word "practice," other businesses are not usually referred to as solo practices.
As with all businesses, a sole proprietorship is subject to certain legal and tax consequences that apply to that particular business structure. For example, business income or losses from the operation of a sole proprietorship flow directly to the owner on his individual tax return. And since there is no separate legal entity involved, such as a corporation, LLC or partnership, the business is merely an alter ego of the individual owner and he is subject to personal liability for its business debts.
Structure of Solo Practice
A solo practice can be set up as a sole proprietorship or as any other business structure that allows for a single owner, such as an LLC or corporation. Independent professionals can manage their own practices and still have the option to structure their business as a separate legal entity. This provides them with the same benefits as other small business owners with business structures that minimize self-employment taxes and make the business entity liable for business debts instead of the individual owner.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.