So, you’re ready to start your own business, you say? You’ve got an idea for a great product or service and you’re good to go, or so you think. Business owners have a lot to think about already, but at the onset, consideration must be given to a couple of factors – because now it’s time to get legally recognized as a business.
A sole proprietorship is when someone owns and runs a business by themselves. This structure is the simplest and the easiest to understand. In order to form a sole proprietorship, you don’t need to take any formal action. You are a sole proprietor if you are selling your services for yourself and by yourself.
Of course, there are some definite advantages for the sole proprietor: With no one else to answer to, the profits are certainly all for you. As the sole proprietor, you maintain total control and flexibility to run the business as you see fit; sole proprietors require less capital to cover startup costs and creditors are more likely to extend credit if needed.
It is noteworthy that from a tax standpoint, there is no differentiation between you and your business, so you are taxed as one. You just use a Schedule C and a Standard Form 1040.
All of that could be great, but it’s also important to go over the same information from a different perspective. If you decide to go it alone as sole proprietor, there are some disadvantages to consider with that: With no one else to answer to, you assume full liability of the business, as well – all your debts are yours alone and creditors can go after your personal property to satisfy a claim if your business assets aren’t enough; banks may be reluctant to give loans due to higher turnover rates and usually smaller assets; even if you required less capital to startup, it may be more difficult for the sole proprietor to raise money for the long term needs of the business.
If this still sounds confusing, let Dunham Tax Professionals help you make sense of it all. Schedule an appointment today.