Thinking of starting a business? Trying to decide how to form and organize the business. Considering a sole proprietorship.
The sole proprietorship business form is the simplest and easiest to get started. In fact technically you can start one with no real paperwork besides what you will do when you file taxes. For instance say you start mowing lawns as a college student over the summers. When you file taxes the IRS/government both state and federal will consider you a sole proprietor.
Now having said that typically you are supposed to get a business license from the city or state but that is about as easy as can be and depending on the location typically just involves a form and ID information.
Pay Attention to this – Business Partners?
In a sole proprietorship you can’t have partners. Hence the name “sole proprietor.” The minute you get a partner you have just transformed the business entity into a “General Partnership“. Yeah it’s that simple.
Watch Out! You need to make sure you understand this…
Sole proprietors are solely responsible for all business debts and liabilities. That means the owner, aka YOU are personally responsible for whatever financial burdens result from the business. For example if you get sued then whatever you own is up for grabs if it comes down to it.
Just FYI – Taxes – No Big Deal
Taxes are simple for a sole proprietor. Just use the IRS schedule C, “Profit or Loss From Business”. This is just a part of the typical 1040 form that you are used to. You are taxed at the same individual tax rate. This concept is typically referred to as “Pass Through Taxation”
Just to be clear the whole filing process is way simpler for a sole proprietor then it is for a corporation. This is huge incentive to be a sole proprietor vs a corporation.
This is new – Health Care Tax Breaks for Sole proprietors
Now a self-employed person can write off the cost of health insurance. This tax advantage use to only be enjoyed by corporations.
Don’t fall for This Myth – You will save on Personal Income Tax by Incorporating
The self-employed have to pay double the social security and medicare taxes that a person who was employed by someone else would. This is because the employer would pay have those taxes. Thus some folks incorrectly think they should pay themselves through a LLC. However this is incorrect. If you have a one person corporation then you will end up paying the same amount in the end. Half through the corporation and half through your individual taxes.
Think About it – Is it Right for Your Business?
Be sure to give proper consideration to how you form your business. Do lots of research (like you are doing here at this finance blog), and spend the time you need to make a sound decision.