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Is a Sole Proprietorship right for me: Feature Article
If you are thinking about starting your own business than the first thing that you need to figure out is what type of business you are going to form. When it comes to forming a business you can form a sole proprietorship, corporation, partnership, or even a limited liability company. But the thing is you must decide which business form is right for you. And the best way to determine which business form is right for you is to take a look at the various forms to see what they are, how they work and what the advantages and disadvantages are.
What is a sole proprietorship?
Basically a sole proprietorship is a one person business that is not registered with the state as a corporation or a limited liability company. In fact this type of business structure is one of the oldest forms of business, but it is also one of the easiest forms to set up. In fact this form of business is so easy to set up and maintain that you could actually own one already without even being aware of it.
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Many people who do work on the side, meaning they are contractors and are not on an employer's payroll, are actually sole proprietors and they own their own business. But just because these are so easy to maintain and set up that doesn't mean you should not pay attention to what you are doing. The reason for this is that there are going to be things that you need to comply with when it comes to sole proprietorships.
Helpful Resources: 1. Sole proprietorship This article gives you a breakdown of everything that you need to know about sole proprietorships, including the benefits and drawbacks to having this type of business. 2. Sole Proprietorships 3. Sole Proprietorship Basics 5. Doing Business as a Sole Proprietor 6. Sole Proprietorship: The Right Business Structure? 8. Sole Proprietor Magazine 9. Sole Proprietorship Startup Costs 10. Sole Proprietorships FAQ |
Depending on where you are forming your business you might have to comply with local registration, business licenses, or permit laws to make your business legitimate. Not to mention that depending on what type of business you are running you might have to meet other requirements to ensure that everything is on the up and up. But not only do you have that to worry about but you also want to make sure that your business is well tended too. The reason for this is that when it comes to a sole proprietorship you are personally responsible for paying both income taxes and business debts.
How to register your sole proprietorship
When it comes to a sole proprietorship, unlike corporations or limited liability companies, there are no special forms that you need to file and there are no fees that you need to pay in order to get your business up and running. For the most part all that you are going to need to do is state that your business is a sole proprietorship when you are completing all of the general registration requirements that apply to all new businesses. For the most part this is going to be obtaining business licenses, permits and things like that.
In fact a lot of cities and even some counties require any businesses in their jurisdiction, including home based business, to register with them and pay at least a minimum tax. In return for that tax you are paying you will receive either a business license or a tax registration certificate.In addition to the business license you might also need to obtain a seller's license from your state and/or a zoning permit from your local planning board. But depending on if you have employees or not you will also need to obtain an employer identification number from the IRS.
When it comes to your business name you are going to need to keep in mind that if you are going to be doing business under a name that is different from your own than you are going to need to register that name with your county. This business name is also known as a fictitious or assumed business name, which is how you will see it printed in the local newspapers.
Advantages of a sole proprietorship
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- No additional work must be done in order to start this type of business, basically there are no legal formalities to form or dissolve this style of business
- - A sole proprietor is not separate from the individual, basically what the business makes is the same thing that the individual makes
- - Doesn't have the operating expenses that other legal entities have
- - When deciding to extend credit a bank will only look at the net worth and individual credit history of the owner rather than the company
- - In the United States a sole proprietorship has the option of buying health care for self-employed persons. A great example of this is a Health Savings Account.
- - Handling the money for this business structure is easier than other legal business structures. The reason for this is that no payroll set up is required to pay yourself.
Best bet is to opening up a business checking account so you can keep your funds separate, which makes tax time even easier.
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- A sole proprietorship files simpler tax returns to report its business activity.
This activity is usually reported on an individual's personal tax return and both income and deductions are reported with a Schedule C.
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- Has two very nice tax advantages, which happens because of the fact that the law makes no distinction between you and your business
Avoid double taxation - basically this can only occurs if you are doing business through a corporation rather than a sole proprietorship. The reason that you get a double tax is because the corporation itself has to pay income taxes separately from their owners. So how a double tax occurs is that the corporation and you are both paying income taxes on the same dollars. A corporation has to file a separate tax return and the income is taxed once there. And then you as individual have to file a personal tax return and the money is once again taxed.
Deduct business losses - this is something that you can do but you can only deduct your losses to the extent of your total income that you have from all sources. And if you are married your business losses will also offset your spouse's income. So basically by being able to deduct losses as a sole proprietor you can actually reduce your family's total income tax burden, meaning that you will end up having to pay less in income taxes or perhaps not even paying taxes at all. This can actually be very beneficial to you during a start up or down turn phase of your business.
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- Has the advantage of the least government regulation
Disadvantages of a sole proprietorship:
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- All of your non-protected assets, such as your house or even qualified retirement accounts are at risk because you are ultimately responsible for the business debts
- - Have a hard time raising capital because shares of the business cannot be sold
- - People tend to trust business a little bit more that are organized as a corporation or a limited liability company, something about seeing those after a business name adds more creditability to the business
- - Can be harder to raise bank finance because a sole proprietorship cannot grant a floating charge. Many jurisdictions require a floating charge for bank financing
- - Hiring employees is often very difficult
- - Business has unlimited liability so if you are sued you will be personally liable
- - Life span of the business is uncertain. The reason for this is that as soon as you decide not to have the business anymore or if something happens and you die then the business no longer exists. This means that your children cannot take it over without starting all over.
- - Can be difficult to find health insurance because of family members who have a previous medical condition or finding affordable health insurance
- - As a business becomes more successful the risks that accompany that business tend to grow. And the only way to minimize those risks is to form a corporation. Or in the United States you could form a Limited Liability Company, which will give you limited liability but allows you to treat the business as a sole proprietorship for income tax purposes.
- - Might end up paying higher income taxes, depending on how much you make and if you are married. But if you incorporate you might be able to reduce your tax rate
- - Cannot take a tax deduction for your health or life insurance. But a full deduction for your health insurance and a $50,000 life insurance policy deduction is allowed for corporations, as long as all the employees are offered the insurance
But now that you have read through the way a sole proprietorship works and the various advantages and disadvantages that it has to offer you are going to need to make a decision on if this type of business is right for you. Just keep in mind that there are significant tax and legal repercussions that stem from your decision to conduct your business as a sole proprietorship and you need to be aware of what those repercussions are so you can avoid any unexpected and unintended consequences
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