Is It Right for Your Small Business?
If you’ve long dreamed of opening your own business and are now about to take the plunge, one of the first questions that you’ll need to answer is whether to establish it as a sole proprietorship, partnership, or corporation.
Sole proprietorship offers several advantages, including the ability to function with far fewer bureaucratic requirements. Sole proprietorship businesses are able to report their income directly on the owners’ personal income tax return by simply adding a Schedule C to their 1040. By contrast, partnerships and corporations generally are required to file separate returns (though LLCs may also be able to file a Schedule C and in some cases a state-required LLC return.)
Though sole proprietorships are generally easier to administer, we do suggest several adjustments to the way that you do business in order to ensure total clarity and ease of bookkeeping.
One of the most important tips that we offer sole proprietors is to establish a separate checking account for the specific use of the business. By depositing income and paying expenses out of this dedicated account, things are much simpler.
Sole proprietorships may be required to register for specific business-related permits or to apply for a local government business license, and if your business is a retail operation you will likely need to apply for a resale permit and to charge local and state sales taxes. You will also need to remit those taxes.
Sole proprietorships that employ workers are required to withhold payroll and pay payroll taxes, which means that it will be necessary to apply for an Employer Identification Number (EIN). Though many sole proprietorship accounting needs can be accomplished using the owner’s Social Security Number, that is not the case for payroll – the good news is that doing this is as simple as filling out a form SS-4 and submitting it to the IRS. This process can easily be accomplished online at the IRS website.
Drawbacks to a Sole Proprietorship
In addition to these minor administrative requirements, liability is the single major drawback to establishing your business as a sole proprietorship. Businesses that establish themselves as sole proprietorships bear complete responsibility for all legal claims and debts against the company.
There is no separation between your business assets and your personal assets, and that means that if a person suffers some kind of harm as a result of something that happens on your property or as a result of a service you provided or a good that you sold, any resulting court award comes out of your assets. You run the risk of losing your business, but also your home, your personal vehicle, your investments, and any other property that you hold.
Advantages to a Sole Proprietorship
One of the biggest advantages to establishing your business as a sole proprietorship is the ability to set aside tax-deductible contributions for your retirement simply and easily. As long as you don’t classify your business as a partnership or corporation it is assumed to be a sole proprietorship by both the federal and state government and the IRS, without any specific forms or documentation required.
Because sole proprietors have complete discretion regarding their expenses and the way that they manage their revenue, they have the opportunity to be highly strategic in their accounting and provide themselves with a number of tax advantages. A sole proprietorship’s taxes are much easier to prepare, and the owner is even able to employ family members and save money on Social Security and Medicare by employing their children. Even paying federal taxes can be eliminated for up to $6,200 worth of income paid to family members.
Though establishing your business as a partnership or corporation can protect you against personal liability in your business’ operations, there are a number of important advantages to selecting a sole proprietorship for your business model. The decision should be based upon a number of factors, including the risk that your business has of being sued. If you would like to get advice about which of the various types of business entities is most appropriate for your business, call our office today at (956) 272-0115 to set up a convenient appointment. We’ll be happy to help.
Looking to start a business in the Brownsville area? Give us a call at (956) 272-0115.