Sole Proprietor versus Other Entity Structures…
Are you thinking of starting a business or currently operating as a sole proprietor? We want you to consider this may not be a viable option for your business moving forward.
Below are a few reasons why being a sole proprietor is a poor choice for operating your business and we want to explain why and help you understand how to solve this problem.
One major reason is you’ll be personally liable if an accident were to occur. Let us tell you a story of how this would work in real life…
Consider you have recently opened a small boutique in your town that you’ve dreamed of your entire life. You’ve saved, planned and now the dream is finally coming to fruition. You’ve waited for the day you could quit your job and do something you were passionate about knowing you could add more value to others.
Start-up capital is tight due to initial expenses during the opening. You decide to go against advice and not form an entity (even a simple LLC) to save money and figure you would do this once you had revenue. It’s your grand opening and you are excited to finally throw open your doors with a big smile and welcome the public into what you’ve put your blood, sweat and money into over the previous months.
Not a half hour into your opening someone slips and falls hurting themselves in your shop. You feel horrible for this person and do what you can to help them get immediate assistance. You go out of your way to ensure they’re alright. Unfortunately, a few days later you are served with a lawsuit because of this incident and before you know you are nearly out of business before it truly began.
Listen, you may be saying that’s not my type of business. We appreciate that thought, but there are additional reasons why operating this type of entity is a poor choice.
Let’s discuss those reasons now…
- You put everything you own at risk if a lawsuit or judgement arises against the business.
- You will pay self-employment tax at 15.3% on the taxable income from the business.
- By operating in this manner, you aren’t building credit for the business.
- You are more likely to be audited compared to other entity structures, especially if you are running at a loss (thereby risking hobby loss rules).
- Based on the new 20% qualified business deduction, you are subject to phaseouts if your taxable income is above $315K.
Forming an LLC is one great option to pursue, but you will be taxed (if it is just one member) the same as a sole proprietor. This will give you asset protection, but you’ll have to deal with the other four issues.
Please note, this isn’t always the worst way to operate and we analyze that when we sit down with you to discuss your business that allow you to make decisions based on facts and figures.
If you would like to discuss starting a business, review your current operations or get help setting up the proper entity, please contact our of business advisors today!