13 Jul Sole Proprietorships-Pros and Cons
The sole proprietorship (SP) is the simplest form of doing business. No tax ID# or Employer Federal ID# is required. All of your income and expenses for your business are reported on Schedule C of your Form 1040 Tax Return-therefore, no extra return is required to be filed for the business.
Two Big Problems with SP
- Tax Planning to avoid self-employment tax (SET). The primary disadvantage of the SP is the 15.3% SET on the net income of the business; this is a surprise to many when they prepare their tax return in the spring of the following year. However, this potential problem can be planned for well in advance of your tax filing with the proper tax planning. Generally, I recommend that if you plan to make more than $30K in net income to form an S Corporation.
- Liability exposure is the other major problem. You, as the owner of the business, expose your personal assets for your actions or employee actions in the course of running the business. If you want to mitigate this exposure, a strategic option is the form and another entity such as an Limited Liability Company (LLC) or Corporation.
If you are investing in a robust marketing plan to “brand” your company, setting up an entity would be advised to protect your name in the state you’re doing business. Also, the SP is cheap and easy, but could cause some issues to re-brand; the LLC or corporation generally provides more legitimacy. Obviously, if you have a partner or investor, its a given that you should form an entity to operate the business.