Can a sole proprietor take on equity partners?

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(FORTUNE Small Business) -- Dear FSB: If I own my business as a sole proprietorship, is it possible to give an equity stake in that business? Or is that only possible in a corporation or LLC?

- Joshua Gribschaw-Beck, Tempe, Ariz.

Dear Joshua: According to Walter Robinson from Walter Robinson & Associates LLC, a Chicago firm that provides tax and accounting services to small businesses, if someone other than the proprietor takes on equity in the business, the sole proprietorship will need to be reorganized as another business entity such as a partnership, LLC or corporation.

The first thing to consider when doing this is where you want to organize, as corporate rules vary widely state to state.

"A lot of major corporations organize in Delaware because corporate governance there is favorable," Robinson says. "But that means that if there is a lawsuit involving your company, it will have to be heard in Delaware. It's generally simpler to organize in the state in which your business is resident."

For Arizona, details on registering as any one of a number of business entities can be found at the Secretary of State's website: http://www.azsos.gov/business_services/filings.htm and at the website of the Arizona Corporation Commission: http://www.azcc.gov/.