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How to Decide if a Sole Proprietorship Is Right for Your Business

There are a tremendous number of decisions you must make when you decide to start your own business. You need to research the market to gauge the need for whatever your company will offer. Then, there’s figuring out how to brand your business and position it among your competitors.

However, long before you can open your doors, you need to decide what business entity will work best for you. There are several options, including corporations, partnerships, limited liability companies, and sole proprietorships. For entrepreneurs wanting to bring their dreams to life, this structural end of the business can be tedious and confusing.

Selecting the right one is important. It will affect factors such as start-up costs, liability, and taxes. If you’re starting small, sole proprietorship may look like the right path to take. Here’s how you can decide if you should follow it.

You Want to Avoid Formality

You don’t have to do anything to form a sole proprietorship. There’s no paperwork to register or costs to incur in establishing a business structure. If you just start a business, you’re considered to be a sole proprietor.

This is you, “doing-business-as” whatever you name your enterprise. You still might want to do an online search of existing company names on your secretary of state’s website. That way, you can avoid potential legal issues down the road.

A sole proprietorship allows you to simply hang out your shingle and start doing business. If that simplicity appeals to you, this format might be the way to go.

You Have Little Money to Launch

A lot of businesses begin on a shoestring budget. What you have is poured into your products, services, and marketing. And there’s little, if any, left over to invest in forming a corporation, partnership, or LLC.

These other business structures require completing and filing certain documents along with their accompanying fees. Starting a corporation, for example, can cost thousands of dollars in filing fees, taxes, and legal expenses.

Even sole proprietors need to check with local government entities to see if they require a business license. Otherwise, you can put your limited funds toward the company itself and get off to a good start.

You’re On Your Own

As the name implies, a sole proprietor operates alone. You pay taxes on income as an individual filer with the IRS, completing a Schedule C for business income and expenses. If you have a partner or investor in your business, you will likely need to choose a different type of entity. That’s because profits, losses, income, and liability will be shared.

This doesn’t mean that you can’t have employees as a sole proprietor. You’ll just need to make sure you comply with employment laws, tax withholding, and other rules and regulations.

If you’re the only person who owns or has an interest in your company, sole proprietorship may be a good fit. Down the road, if you need to take on partners or investors to grow your business, that’s OK. You can change your entity structure as needed.

Liability Isn’t an Issue

There’s no doubt that we live in a litigious society. Disgruntled customers, clients, competitors, and employees might pursue lawsuits if they believe they’ve been wronged by a business. And a small business that doesn’t prevail in court will probably be forced to close down.

Sole proprietorships offer no protection against liability. Someone suing your business is suing you. As such, your personal assets are on the hook if a judgment is obtained against you. You need to consider potential liability when deciding whether this structure is right for you.

Many people opt for an LLC instead to shield their personal assets from liability. It does require a little paperwork and fees, but that protection may be worth it. But if you don’t think you could face any liability issues, stick with the sole proprietorship.

You’re Prepared to Pay for the Privilege

The dream of entrepreneurship comes with a price, and not just the cost of doing business. Consider how much of your paycheck when working for someone else was reduced by taxes your employer paid or matched. Someone must pay Uncle Sam for Social Security, Medicare, and earned income. As a sole proprietor, that someone is you.

You may think your income, after expenses, will be little. Therefore, you won’t owe any taxes to the IRS. However, “self-employment tax” has to be paid regardless of income. It’s that Social Security and Medicare contributions you can’t avoid. So, be prepared to pay up every year on your own dime, even if you operate at a loss.

You’ll also be the one buying your own health insurance, unless you have coverage under a spouse or other person’s plan. And if you want to contribute to a retirement fund, that’s solely on you as well.

To Go It Alone or Not

There are some clear advantages to operating your business as a sole proprietor. The lack of paperwork, formation fees, and the freedom to launch without delay are appealing.

Make sure you research all the structural options you have and weigh the pros and cons of each. For many entrepreneurs, it’s the way to go. If a sole proprietorship looks like your path to success, take it.

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