Is sole proprietorship an option for online education app business?

Question

I don't have much idea about business and legal stuffs. If a person wants to start his/her own online teaching business through his/her own app in the app store that involves real money transactions, should he/she register a business? If yes, is sole proprietorship allowed? Or, is it even an option? If it is not an option, then which business (LLP or OPC) is suitable for this scenario? According to Indian Law

Answer 1

I am answering this question under U.S. law, but the laws of other countries could apply and could lead to different answers.

If a person wants to start his/her own online teaching business through his/her own app in the app store that involves real money transactions, should he/she register a business?

Yes. This would be the best choice, even though it is not legally required. Also, often the platform from which the app is provided will require you to have a legal entity even though the law does not.

If yes, is sole proprietorship allowed?

If you don't register, you are a sole proprietorship, which is the default option. If you register only a trade name, you are also a sole proprietorship.

Or, is it even an option? If it is not an option, then which business (LLP or OPC) is suitable for this scenario?

Either a limited liability company (LLP) or a corporation (in the U.S. electing to be taxed under Subchapter-S of the tax code) would usually be a better choice. These entities provide limited liability protection against all contractual debts that aren't personally guaranteed and all lawsuits for civil wrongs in which the owner didn't personally commit the wrong. In the U.S., an LLC would be easiest in most cases since it is taxed like a sole proprietorship when it has one owner and doesn't elect otherwise, but provides limited liability protection.

Answer 2

Incorporating as a limited liability company has the advantage that your personal finances are separated from the company finances. This is important in case your business starts to run a deficit and goes bankrupt. This, for example, can happen when:

• Your business stops being profitable, but has fixcosts which you can't easily get rid of (long-running leases, supplier contracts with purchase guarantee, employees you can't fire...)
• Someone sues your business for some reason. (Note that even if you could win the lawsuit eventually, you will incur legal costs)
• Part of your business plan was to take a loan, and then repay that loan with future revenues. But those revenues turn out much lower than you estimated and you can't pay back the money you owed.

As a sole proprietor, you would be liable with you personal assets. A limited liability company, only the assets of the company would be subject to liquidation while your personal bank account and property stays untouched.... in theory. In practice, there are often ways for your creditors to "pierce the corporate veil" and make you as the company owner personally liable. This is possible, for example, if:

• You didn't have a proper separation between personal and company finances (like buying groceries with your company credit card).
• You didn't fulfill all the formalities which are required by company law.
• You misappropriated company funds (for example, when the reason why your company is bankrupt is because you paid yourself an exorbitant salary).
• You lied to your creditors about the state of your business or you engaged in some other unlawful behavior.

You might notice that some of these things are avoidable if you just do your homework and follow a couple simple rules. But you can not expect anonymous strangers on the Internet to tell you all of those rules and tell them to you correctly. So it makes sense to get some legal advise from a professional attorney when you set up a company.