When you start a new business, you are confronted with a choice – what type of business entity to employ? The most common business entities among small businesses are sole proprietorships, limited liability companies, and S-corporations. Which one is right for you? This post will summarize the pros and cons of sole proprietorships. Here’s one about limited liability companies. Click here to learn more about S-corporations.
The best thing about sole proprietorships are their relative ease. They are very easy to set up, requiring no formal paperwork. You can operate your business under your own name using your social security number as your tax identification number. If you choose, you can file an assumed business name with the State (in Idaho, that’s just a one-time fee of $25). You could also elect to use an employer identification number (EIN) in lieu of your social security number – generally not a bad idea in today’s world of potential identity theft.
Sole proprietorships are also relatively easy to operate administratively. There are no required meetings of a board of directors. As the sole owner of the company, you can put money in or take money out as you please with no tax consequence. You are not subject to income or payroll tax withholding (except to the extent you employ other people). Additionally, sole proprietorships report their business activity on the individual income tax returns of their owners – there is no separate tax return for the business.
Speaking of taxes, there are plenty of taxes to pay. The profits from a sole proprietorship are taxed not only for federal and state income tax purposes, they are also fully subject to self-employment taxes. For 2014, the self-employment tax is 15.3% for the first $117k of profit, and 2.9 – 3.8% for profit in excess of $117k.
A sole proprietorship offers no protection against personal liability. There’s nothing to stop a creditor of the company (through a loan, a lawsuit, or any other way) to attack the personal assets of the owner – bank accounts, automobiles, real estate, etc. If you want the convenience of a sole proprietorship, you’ll want to make sure you have sufficient insurance and plenty of risk tolerance.
Speaking of risk tolerance, it’s legal disclaimer time: This post is informational in nature, and does not constitute legal or tax advice. We would, however, be happy to consult with you to determine which of the ideas presented here, if any, should be implemented in your specific situation.