Guide for sole proprietorships

Website design By BotEap.comMany people who start a business have little knowledge of or interest in business entities and thus become sole proprietors. There are pros and cons to this approach.

Website design By BotEap.comA sole proprietorship is a default business form. If you start your own business and do not form an official entity, you are a sole proprietor. Congratulations! If you start a business with another person and do not form a business entity such as an LLC or corporation, you are not a sole proprietor. You are a general partnership. I just thought I’d be clear on that.

Website design By BotEap.comThere are some significant advantages to being a sole proprietorship. First of all, it is very simple. Obviously, you don’t really have to do anything other than obtain the necessary business licenses for your area. You can focus on making money with a minimum of administrative hassle. This also makes it economical to start up.

Website design By BotEap.comSole proprietorships are also very simple from a tax point of view. Since there is no official business entity, business finances are handled on your personal tax returns. Report income, expenses, etc. with the Schedule C that accompanies the 1040 form. Unfortunately, keep in mind that you’ll have to pay self-employment tax, a whopping 15.2 percent. If you don’t know ahead of time, it can be deadly come tax time.

Website design By BotEap.comIf sole proprietorships are so easy, why would anyone form an LLC or a corporation? Well, there is a big downside. As a sole proprietor, you are personally responsible for all business debts. This includes debts because the business is not making money and you owe a vendor, as well as any judgments arising from a lawsuit against the business. Most businesses fail in the first two years, so this is a very big risk. If you were to form an LLC or a corporation, you would be protected from such debts even if the business failed completely or you lost a multi-billion dollar lawsuit.

Website design By BotEap.comMany small business people start out as sole proprietors. Sometimes it’s an intentional choice, but sometimes people just don’t know any better. Either way, this is a good approach, but you run a big risk of being personally liable. If you own something of value, like a home, you should seriously consider forming an LLC or corporate entity so you don’t lose the assets if things go wrong.