Choosing a Business Structure: Sole Proprietorships

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Advantages

The sole proprietorship is simple to set up because it doesn’t require you to create a controlling document. After registering or licensing your business with your state and local governments (so they can tax you appropriately), you’re free to hang out your shingle. Federal taxes are pretty easy; you just add a Schedule C – Profit or Loss from a business – to your individual Form 1040. Also, pass-through entities such as sole proprietorships will receive a 20% tax deduction under the recent tax reform for 2018.

Disadvantages

As a sole proprietor, if something goes wrong, your personal assets have no legal protection. You are personally liable for any mistakes you may make in your business, or any debts the business accrues. Banks may be reluctant to grant loans to sole proprietors, though this may not be much of an issue if, for example, you’re a consultant working out of a home office and don’t have much overhead.

Also, this may not be a suitable structure for a growing company or one that hires a lot of employees. But remember, you can always change structures if you outgrow your current one.

Deciding Factor

The level of personal risk you take on should be the deal breaker. If people in your line of work are subject to controversy or lawsuits, it may be best to check out an LLC instead.

Game Plan

Check to make sure your personal liability insurance and umbrella policy is adequate. In addition, be sure to talk to an accountant, who can determine your eligibility for business deductions you might not think of on your own. You’ll also need to prepare for quarterly estimated payments to the IRS – and paying both the employee’s and the employer’s halves of the payroll tax. Keep in mind that initially choosing a business structure isn’t permanent, and changing it isn’t that difficult. Here’s an article from the SBA that tells you what’s involved to change your business structure.

Learn more about sole proprietorship insurance.