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pros and cons of sole proprietorship

Pros and Cons of Sole Proprietorship

Are you a sole proprietor now, or are you planning to start up your own business? Many people own and operate a small business as the sole owner. You might have employees, might be part-time, might work from home, etc. This article discusses the pros and cons of sole proprietorship and some tax information you’ll want to know.

 

A sole proprietorship is a small business owned by one person. It is the One-Man Show, so to speak. The owner has total control over the business and is personally responsible for all of its obligations and liabilities. According to the U. S. Census Bureau, 73 % of our 28 million small businesses are sole proprietorships. Let’s take a closer look at the different pros and cons of a sole proprietorship.

Pros and cons of a sole proprietorship

The advantages and disadvantages of sole proprietorship may significantly effect whether or not this tax entity is right for you.

Advantages of a sole proprietorship

It is the simplest (and most common) business structure to start and run. As the sole proprietor, you are entitled to all of the company’s profits. You determine the projects and priorities. You have the flexibility to set your own schedule and then celebrate the results of your hard work.

Disadvantages of a sole proprietorship

Because this business structure does not limit personal liability, you are liable for all of the company’s debts and losses. Also, you might work long hours and have little or no profit to show for the first few years.

Regulations on sole proprietorships

You may need to register your sole proprietorship with the state and/or local government. One of the advantages of sole proprietorship is the relatively small number of government regulations in comparison with larger businesses in the U.S.

Taxes on sole proprietorships

Income. Of course, you must report and pay income taxes. Income taxes flow through the business entity to the sole proprietor. It’s called “pass-through taxation” or “flow-through taxation.” This means you do not pay taxes as a separate business entity. Instead, you (the sole proprietor) must report the company’s profits or losses, and then you pay all taxes on your company’s earnings as part of your personal income taxes.

Payroll and Self-Employment. In addition to reporting and paying income taxes, sole proprietors must remit payroll taxes, including social security and Medicare, for their employees. Since sole proprietors employ themselves (so the IRS considers them to be both the employer and the employee), the business owner must remit what is known as the “self-employment tax.” The self-employment tax is a combination of the employer and employee shares of social security and Medicare taxes.

The payroll tax remission schedule can be complicated if you have limited payroll tax knowledge. In that case, you may want to use a payroll service that handles the filing and remittance of your payroll taxes to help you meet tax deadlines promptly.

Is sole proprietor the right choice?

There are other business structures to consider, such as partnerships, LLCs, and corporations. Many startup owners should consult an attorney with business structuring experience to determine whether sole proprietorship is the best business structure for their needs.

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