By Gary W. Smith

Choosing the right entity for your business isn’t easy.  In our first post, we listed questions you need to consider and the potential tax structures available to your business.  In this post, we will look at the first structure, sole proprietorships.

The keyword for sole proprietorships is “sole.”  There can be only one!  If you have more than one owner, you can’t have a sole proprietorship.  If the owner is an entity and not an actual human being, you can’t have a sole proprietorship.

The revenue and expenses related to a sole proprietorship are reported on Schedule C of your Form 1040 individual income tax return.  You don’t have to file a separate tax return for the business.  This is a relief to some because of the potential cost of additional tax return preparation.  However, don’t be lulled into thinking you’ve got it made.

The biggest tax issue related to having a sole proprietorship is self-employment taxes.  Every dollar of profit you create is subject to self-employment taxes.  Everything you make is treated like compensation.  You don’t have separate “profits” not subject to self-employment taxes.

Also, you aren’t a W-2 employee subject to tax withholding.  You have to make estimated income tax payments during the year.  If you don’t, tax time may shock you.

Be aware, taxes aren’t the only thing to consider.  You also need to understand your personal liability for your business operations.  If you are a sole proprietorship without any legal entity created by filing documents with your state government, you are personally liable for everything related to the business.  If a customer trips and falls, you (and your insurance) pay.  If your employee has a wreck while on company business, you (and your insurance) pay.

In order to get the liability protection you need and the sole proprietorship taxation you think you want, you can create a limited liability company.  If the limited liability company has only one owner, it can be disregarded for income tax purposes.  Keep in mind, however, the liability protection doesn’t protect you from something you, the owner, did.  If you are in a wreck or you, individually, caused the harm, you can still be liable for it.

We are going to focus on C corporations in our next post.

Please feel free to send me an e-mail at gary.smith@vennlawgroup.com if you have a question about these options.

Gary W. Smith is an attorney at Venn Law Group with more than 20 years’ experience providing legal counsel and innovative solutions to business owners and management teams. His areas of focus include mergers and acquisitions, succession and exit planning, securities and capital structures, business structures, and tax. He excels at navigating the legal complexities of diverse industries ranging from professional services and IT infrastructure to manufacturing and real estate.