Sunday, July 19, 2009

Business Organization: Sole Proprietor

As the the economy continues to shed jobs, some unemployed people are turning this opportunity into a chance to start their own businesses and turn their passions into money making endeavour. In this series on "How To Start Your Own Business" I will examine the different types of business structures, the types of forms you will need to file for federal tax purposes, and the advantages and disadvantages of each business structure.

The first type of business structure I will discuss is the sole proprietorship. The sole proprietorship is the most common type of business structure chosen for small businesses. A sole proprietor is someone who owns an unincorporated business by himself or herself. The owner or proprietor is responsible for all business transactions and is personally liable for all debts and liabilities incurred by the company. The owner pays taxes on income from the business as part of his or her personal income tax. Normally this is done by filing Form 1040 and either a Schedule C or a Schedule CEZ. Sole proprietors need to comply with licensing requirements in the states in which they're doing business, as well as local regulations and zoning ordinances. Some of the other types of federal taxes you may be responsible for as a sole proprietor are self employment taxes, excise tax, and various other taxes if you hire employees.

Self Employment Tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. You will file your self employment taxes using Schedule SE along with your 1040 form.

Employment Taxes are paid only if you hire employees to work for your business. Some of the taxes you will be required to pay are:

  • Social Security and Medicare taxes.
  • Federal Income Witholding Taxes
  • Federal Unemployment (FUTA) Taxes.

For more information on employment taxes see Publication 15.

Excise Taxes are paid if you are involved in

  • Manufacture or sell certain products.
  • Operate certain kinds of businesses.
  • Use various kinds of equipment, facilities, or products.
  • Receive payment for certain services.
Advantages of a Sole Proprietorship
  • A sole proprietor has complete control and decision-making power over the business.
  • Sale or transfer can take place at the discretion of the sole proprietor.
  • No corporate tax payments.
  • It can also be less costly to start a business as a sole proprietor, which is attractive to many new business owners who often find it difficult to attract investors.
  • Minimal legal costs to forming a sole proprietorship.
  • Few formal business requirements.

Disadvantages of a Sole Proprietorship

  • The sole proprietor of the business can be held personally liable for the debts and obligations of the business. Additionally, this risk extends to any liabilities incurred as a result of acts committed by employees of the company.
  • All responsibilities and business decisions fall on the shoulders of the sole proprietor.
  • Investors won’t usually invest in sole proprietorships.

No comments: