Sole Proprietorships: Of the four primary business structures, Sole Proprietorships are considered as the simplest form of business structure. A sole proprietorship is simply filing the necessary business forms with your Secretary of State before offering your products and services to your customers. Income and expenses generated from your business dealings are reported on your personal 1040 Form Schedule C, which means no extra tax return is required. In addition, unlike many other business forms, Sole Proprietorships require no Tax ID number, no DBA (Doing Business As), or business bank account although it may be a good idea to open an account for bookkeeping and protection against IRS audits.
Additional advantages of a Sole Proprietorship:
- Low to no cost expense to start: Depending on the state in which you live, Sole Proprietorships are low to no cost alternative to other business structures. If you are deciding to enter into business without much capital, the low start-up costs of a Sole Proprietorship can ease your transition into your first year of business operation.
- Complete control: If you are a business owner who desires to have control over day-to-day business operations, then Sole Proprietorships are your best business fit.
- Easy to dissolve: Unlike other business structures that require an enormous amount of paperwork to dissolve the organization, Sole Proprietorships are rather easy to dissolve without the hassle. Filing the paperwork is quite simple and uses the same tax forms an individual would use for his personal taxes.
- Protecting the name of your company: As a Sole Proprietor, a good way to protect the name of your business is by registering a trademark with the United States Patent and Trademark Office (USPTO). On the other hand, if you decide to operate as a Sole Proprietorship without the use of your personal name, then filing a DBA (Doing Business As) is a another good option.
Are you ready to file for your Sole Proprietorship yet? You may also want to consider this..
Although Sole Proprietorships provide ease of filing with less paperwork, what these structures do not provide is ease from a Self-Employment (SE) tax rate of 15.3 percent on ordinary net income. Yikes! The SE tax is made up of a 12.4 percent social security tax and a 2.9 percent Medicare tax which in total is applied to the first $132,900 of net income. Income above the $132,900 threshold is taxed the 2.9 percent Medicare tax up to $250k for joint filers and $200k for single filers. For business owners exceeding those numbers, they can expect the Medicare tax to jump up to 3.8 percent.
Additional disadvantages of a Sole Proprietorship:
- Personally liable: The biggest disadvantage of a Sole Proprietorship is the lack of protection against personal assets in the event of litigation. Without the protection of what a corporate structure provides, your home, cars, and bank accounts can be seized in order to cover any expenses owed the party of a lawsuit.
- Raising Capital: Trying to raise capital to fund your business can be difficult due to the specific structure type of your company. Potential investors may be hesitant to invest in a Sole Proprietorship because of the personal liability risks it involves. Business loans can also be difficult to obtain considering those types of loans must be secured with your personal credit history in most cases.
- Retaining quality employees: Making all of the major decisions on a day-to-day basis can have its fair share of consequences. Employees have a desire to move up and have a bigger role in the decision making process. If you are unwilling to relinquish a part of day-to-day decisions, then it is quite possible employees may be unwilling to remain with your company.
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