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Sole proprietorship: What it is, Costs and Bankruptcy

The sole proprietorship is one of the possible ways to carry out commercial activity. Let’s see what it is and when it is convenient to choose this legal form of business.

What is a sole proprietorship or sole proprietorship?

The sole proprietorship is the trade name under which a natural person who carries out an activity of production or sale of goods or services (commercial activity) appears on the market. It is therefore the name of a company carried out by a single individual, called an entrepreneur. The company can correspond to the name and surname of the entrepreneur (eg Mario Rossi). However, an invented name is often added to the entrepreneur’s surname that recalls the activity carried out (eg Mario Rossi’s hardware).

When a sole proprietorship is opened, a new legal entity is not created, as in the case of the sole proprietorship (or unipersonal). In fact, entrepreneurs and sole proprietorship are the same things. On the contrary, when a company such as an SRL is opened, a new entity is created. The company has its own name, its own assets, and is the owner of its own rights and obligations. The individual entrepreneur, on the other hand, engages directly with his customers, suppliers, employees, and collaborators. It is he as a natural person who signs the contracts and it is he who is responsible for paying the debts. This particularity must be taken into consideration before choosing the form of business to be adopted for your business.

It is important not to confuse sole proprietorship with similar activities, such as those carried out by freelancers, self-employed or freelancers. These subjects carry out an activity of a mainly intellectual and non-commercial nature (eg engineers, doctors, marketing consultants, photographers). Consequently, they do not have to open a sole proprietorship but it is sufficient to open a VAT number. On the contrary, whoever wants to open a shop carries out a commercial activity that requires a sole proprietorship.

sole proprietorship

Liability and failure of the individual entrepreneur

As we have seen before, the individual entrepreneur is directly responsible for the debts that he accumulates towards the subjects with whom he comes into contact (eg suppliers, customers, employees). These people will be able to turn to the entrepreneur to obtain payment of what is owed to them.

If the entrepreneur does not pay, the creditors will be able to recover from his personal assets (e.g. bank account, car, house). In addition, when the amount of unpaid debts by the entrepreneur becomes too high, it is possible to resort to bankruptcy (today, judicial liquidation). This is a procedure provided only for larger companies (with debts exceeding € 500,000, or with assets exceeding € 300,000 or annual revenues exceeding € 200,000). Smaller companies, on the other hand, cannot “fail”.

Judicial liquidation is a procedure for the recovery of the debts of the bankrupt entrepreneur. All creditors participate in bankruptcy by law. In a nutshell, the entrepreneur’s assets are sold and the creditors divide the sum obtained from the sale. This is an expensive procedure and often does not lead to satisfactory results. For this reason, agreements between entrepreneurs and creditors are increasingly common today (e.g. arrangement with creditors).

Transforming a sole proprietorship into an SRL

The owner of a company may want to transform the sole proprietorship into an SRL. This transformation serves to start a new business with a separate asset from that of the individual entrepreneur. In these cases, what can be done is to close the company and open a new company or leave the previous activity open and transfer the assets and relationships into the company.

In the event of a transfer of assets, the individual entrepreneur can transfer the company or a part to an SRL or any other company. With the total sale, called transfer of business, the assets and contracts of the sole proprietorship automatically pass to the company. To do this, the intervention of a notary is required.

Costs for opening a sole proprietorship and VAT number

To start a sole proprietorship, it is necessary to bear the costs of opening the sole proprietorship. The first step is to obtain a VAT number. This is a free fulfillment. However, it is recommended to be assisted by an experienced professional so as not to make mistakes.

After opening the p. VAT, the sole proprietorship must be registered in the business register. This registration is done electronically by registering with the chamber of commerce. The cost of registration can be up to € 200, including taxes. Finally, for some activities, further formalities may be necessary such as the presentation of the SCIA, for shops and artisans, or specific permits, such as the HACCP certificate for bars and restaurants. For these obligations and additional certificates, the cost could be up to € 1,000.

In addition, the costs to be incurred at the opening are added to the costs relating to management. In particular, it will be necessary to have the accounting of the company followed by an accountant, and in the event that employees are hired, it will be necessary to contact a labor consultant (or payroll consultant). The cost of these professionals varies greatly depending on the geographic area in which you are located.

An aspect to take into consideration before opening a business is certainly that of the taxes of a sole proprietorship. Today, new sole proprietors can benefit from the flat-rate scheme. This is a favorable tax regime that allows for significant tax savings. In particular, new businesses with an annual turnover of less than € 65,000 pay 5% of taxes for the first 5 years of activity (15% for the following years).

Finally, the additional costs to be incurred to carry out the activity as a sole proprietorship are those for the pension contributions to be paid through the INPS registration and, in some cases, the INAIL insurance premiums to cover accidents at work. The amount to be paid varies greatly depending on the sector of activity and the income of the entrepreneur.