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  • Michael Henninger

Entities Series Part 1: Sole Proprietor

Entities Part 1: Sole Proprietorship


- What is a Sole Proprietorship?


A: It's the simplest form of doing business. It is a non-registered, unincorporated business run solely by one individual proprietor. There's no distinction between the owner and the business. These are very easy to establish. Essentially, if you are the only owner and start conducting business, you're a sole proprietor.


You will need an EIN if you have employees, file excise tax returns, or file pension plan tax returns. If not, the IRS generally allows an individual to use their social security number as their TPIN for a sole proprietorship (SP).


Let's take a look at a few of the pros and cons of the SP:


Pros:

- There's no separate tax return. The activity of a Sole Prop is reported on Schedule C of an individual's 1040.

- Ease to start and maintain.

- Control: Since there are no partners or other stakeholders involved, the owner has complete decision making capability.


Cons:

- Liability: The owner is 100% personally liable for all business obligations. This means creditors can go after the owner's personal assets if the assets of the business are insufficient to satisfy a claim.

- Taxes: All net income of the business is subject to Self-Employment (SE) tax, these are the Social Security and Medicare taxes. Since an owner is both employee AND employer, they're responsible for both sides (employers must 'match' the employees contribution). This can equate to 15.3% on top of whatever income tax rate they're subject to.

- Raising capital: Since there are no other stakeholders and no shares to sell, it can be challenging for an owner of a Sole Prop to raise funds.


One thing we will stress throughout this series, entity selection is a big deal. It's best done under the advisement of both your tax professional and legal counsel. This is really the only way to ensure you're choice matches exactly what you're desires are and to allow enough flexibility to adjust as facts and circumstances change. There's no "one size fits all" as it pertains to entity selection.


Next....the Limited Liability Company or LLC


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