Sole proprietorships are the most common type of small business structure. A sole proprietorship is perfect for the owner who wants full control of their business. However, there are some specific regulations and taxes that apply to sole proprietorships. Before you commit to labeling your business as a sole proprietorship, make sure you know both the pros and cons of this business structure.
Advantages of a Sole Proprietorship
Simplicity and Flexibility
A sole proprietorship is the simplest and most common business structure. As the sole proprietor, all of the company’s profits are yours. You are the person determining projects, priorities, and schedules (including your own!). This freedom gives you the flexibility to adjust your schedule and business goals to fit into your life and habits. For many, this is more attractive than having to change and adapt their life around someone else’s business schedule and plans.
Fewer State Regulations
You may need to register your business with the state or the local government. However, with a small proprietorship, you will have relatively few government regulations on your business compared to larger businesses in the United States.
Disadvantages of a Sole Proprietorship
Unfortunately, the freedom that comes with a sole proprietorship carries with it a lot of responsibility. Because you are the sole owner, you are liable for all of the company’s debts and losses. You will also likely have to work long hours, especially at the start of your business, and may not see a positive net profit for the first few years.
Taxes on Sole Proprietorships
Income taxes pass through the business entity to you, the sole proprietor. This is called “pass-through taxation” or “flow-through taxation.” This means you report the company’s profits or losses, and then pay taxes on your company’s earnings as part of your income taxes. This is a more straightforward tax option compared to double taxation, which affects C Corporations and LLCs.
Payroll and Self-Employment
In addition to paying income taxes, sole proprietors must remit payroll taxes, which include social security and Medicare, for their employees. Because sole proprietors employ themselves, the IRS considers them to be both employer and employee. The proprietor then must remit the “self-employment tax.” This tax is a combination of the employer and employee shares of social security and Medicare taxes.
The payroll tax remission schedule can be very complicated if you have not experienced it before. You should consider using a payroll service, such as the kind offered by The Harding Group, to ensure the proper and prompt filing of your business taxes.
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