Advantages of a Sole Proprietorship & Challenges of a Sole Proprietorship

If you have a small business, you may have heard that incorporating is the way to go. However, there are times that forming a sole proprietorship is in your best interests.

If you are planning to start your own small business, then you will have a number of choices for organizing your company. If you are not going to have partners, then you could think about keeping your small business a sole proprietorship.

You will have a choice of registering your company as a C-Corporation, an S-Corporation or even a Limited Liability Corporation [LLC]. But if you are not dealing in any high-risk products or an industry where there are chances of you being sued, then you should definitely think about running it as a sole proprietorship. Here’s why:

  • Ease of management.

    A sole proprietorship format is very easy to understand and run. All you need is the proper license and permits, and you are ready to go.

    You also have to maintain fewer administrative records such as recording the minutes of any meetings, as compared to what you would have to do in any of the other types of corporations.

  • Tax benefits.

    Since the income generated from a sole proprietorship is treated as your personal income, you will be taxed only once; whereas in a C-Corporation, you might expose your small business to double taxation, where your company’s profits will be taxed on a corporate level and your personal income from your business will be taxed as well.

    You can also deduct any business losses to the extent of your total income. Your accounting procedure also becomes very simple, especially when compared to filing corporate tax returns.

    The form for filing sole proprietorship tax returns is usually just a single page called a schedule-C.

  • You can hire your own children and reap the benefits.

    As a sole proprietor, you can hire your minor children and deduct the amounts you pay them in salary from your taxes. The amount you pay to your children is also exempt from Medicare, Social Security, and Federal Unemployment taxes.

    You can save around $1,500 every year and also get your own children to learn the business, which can be very efficient. If your children have other sources of income, then you will have to seek advice from your tax consultant.

  • Ease of changing into a corporate structure.

    If you are facing too many limitations in maintaining a sole proprietorship, you can always convert to an S, C, or Limited Liability Corporation.

    You can always start with a Sole Proprietorship – and as your small business grows, you could shift to another business structure if the need arises.

    On the other hand, if you incorporate your business at the outset, then it will be very difficult to change it on short notice.

Read the above tips and consult your tax consultant so that you can be properly guided according to the nature of your business and the state that you plan to operate in.

If the risk of you being sued is negligible, then a sole proprietorship is the sole way to go.

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