Advantages of Proprietorships
A sole proprietorship is one of the most common ways to organize a new start-up. Many self-employed individuals, home-based businesses, and small cottage industries operate as sole proprietorships. There are lots of advantages to doing business this way, and our expert provides us with a few right here.
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A sole proprietorship is one of the most common ways to organize a new start-up. Many self-employed individuals, home-based businesses, and small cottage industries operate as sole proprietorships. There are lots of advantages to doing business this way, and our expert provides us with a few right here.
- Easy to organize
The great advantage of operating a new business as a sole proprietorship is that it is simple and does not require any formal action to set it up. You can start your business today as a sole proprietorship. There is no need to wait for an attorney to draft and file documents or for the government to approve them. Of course, you may need a local business license, and a growing number of states require you to register to do business in their state, in addition to the usual local licenses that are required in almost every locality. Most states do not impose any income taxes directly on a sole proprietorship.
- Profit (or loss) is yours
All of the profit or loss from your business belongs to you and must be reported on your federal income tax return, Schedule C, Income (or Loss) from a Business or Profession, on Form 1040. This can either be an advantage or a disadvantage for income tax purposes, depending on the circumstances. If operating the business results in losses or significant tax credits, you may be able to use the tax losses or tax credits to reduce taxes on income from other sources. Or, if your sole proprietorship generates modest profits—but not more than about $75,000 to $100,000 a year—overall taxes may be less than if incorporated, assuming you need most of the income to live on.
- Unemployment tax savings
As a sole proprietor, you are not considered an employee of your business. As a result, you avoid paying unemployment taxes on your earnings from the business. Both the state and federal governments impose unemployment taxes on wages or salaries, but not on your self-employment income. Note that a corporation would normally get an income tax deduction for the unemployment tax it paid on your salary, so the actual after-tax savings from operating as a sole proprietorship would be somewhat less than the gross amount of the unemployment taxes you would avoid paying.
- Ability to withdraw assets tax-free
Another advantage of a sole proprietorship is that you can shift funds in and out of your business account or withdraw assets from the business with few tax, legal, or other limitations. In a partnership or a limited liability company, you can generally withdraw funds only by agreement. In the case of a corporation, a withdrawal of funds or property may be taxable as a dividend or capital or violate some states’ corporation laws, potentially causing a loss of your limited liability protection from creditors.
Source: Michael D. Jenkins, attorney and CPA (www.roninsoft.com). Contact him by email at mdjenk@aol.com.
