Choosing A Business Entity
When contemplating starting your own small business, one of the first questions that you need to answer is what type of entity to establish for yourself. There are a number of advantages to sole proprietorship, and it is one of the most popular routes for a one-person business.
Operating as a sole proprietorship is both simple and inexpensive. Unlike partnerships or corporations, sole proprietors are able to file their taxes as part of their individual personal tax return using Schedule C, and from a paperwork or administrative standpoint, there is very little that needs to be done. That being said, establishing as a sole proprietorship does have some downsides and requirements that you should be aware of before making your decision.
One thing that is important to consider is any special requirements based upon the type of business you are operating. Retail businesses often need to have resale permits, and are required to collect and remit both state and local sales tax.
Some local governments may also require application and payment for a business license or permit, and though sole proprietors often take advantage of the fact that they can use their own social security number for tax purposes, you can’t do that if you have employees.
Those businesses that have staff are required to establish payroll withholding and send in payroll taxes, and means that you will need an employer identification number (EIN). Employer identification numbers are available through the Internal Revenue Service website, or employers can submit a hard copy of Form SS-4 to the agency.
Sole proprietors often get into trouble by merging their personal checking accounts with that of their business. It is strongly advised that a separate business account be used both for depositing monies earned and for paying expenses. Doing so eliminates many bookkeeping challenges at tax time.
Another challenge that can confront a sole proprietor is the fact that they have no protection against liability in their business. Whether a legal claim is for a business debt or for an injury that takes place on your business property, if a lawsuit is filed against you then all of your personal assets as well as your business assets are in play and can be used to meet judgments against you. By contrast, LLCs and corporations are able to protect their assets, leaving only business property available in a judgment.
If your business is at risk of having a lawsuit filed against it, this is an important consideration. One positive aspect of being a sole proprietorship that many people are unaware of is the availability of tax-deductible retirement contributions.
The tax ramifications of being a sole proprietor are important considerations.
For help in understanding the impact of the different options available to you, contact Tera D. Kovanes today at (804) 446-6685 to set up an appointment.