By Christi Rains
Without endorsing any single type of entity, please know that this is simply a discussion about the pros and cons of some of the different choices. Any final decision needs to be made between you and those that you rely on for advice (hopefully an accounting expert or attorney.)
The Sole Proprietorship is the simplest and most basic of these entities, designed primarily for the individual. All income is ‘passed thru’ to the proprietor and the profits and losses are handled on the individual’s 1040 at tax time. Now the actual profit and loss will be calculated with the help of a Schedule C form, with the final numbers being added to your personal taxes. The biggest benefit to most people is created here, if losses were incurred with the business, then those losses can be used to offset your tax liability.
Alongside your 1040 will also be a Schedule SE. This is the form that will help you determine your self-employment tax. There are quarterly requirements that go with this annual payment of self-employment taxes. These taxes are based on estimated earnings, and can start with earnings as small as $400 a year in income. Unlike other entities, this is the only time that a sole proprietorship will get hit for taxes.
On the flip side, there are two big disadvantages to creating a sole proprietorship. First, is your liability. In a sole proprietorship, just like everything else, your liability ‘flows thru’ to the personal side. Your personal assets (home, car, etc.) are at risk of being seized in order to fulfill a debt from your company. The second, comes in the form of financing your business. Banks and other lending institutions tend to shy away from sole proprietorships and therefore you’ll generally find yourself having to self-finance.
Those are the basics of a sole-proprietorship, but by no means are they the only things to consider. Please remember to research your own state’s requirements and to consult a trusted advisor.