Getting ready to start your own business? You’ve got a bunch of different choices as to the entity type, including forming a corporation or a limited liability company. But don’t make the mistake the over-looking the sole proprietorship option. For new entrepreneurs starting a small business, a sole proprietorship offers five big benefits.
Reason #1: Setup Simplicity
Here’s a first reason to start your new business as a sole proprietorship: It’s easy.
In fact, you actually don’t need to do anything to “start” your new business as a sole proprietorship. By starting your business, you create your sole proprietorship. Period.
Note that state and local governments typically do want to license businesses, however, including businesses operating as sole proprietorships. Do check out the local phone book or search your state government’s web site for licensing information related to starting a business like yours.
Reason #2: Easy Tax Accounting
Easy tax accounting counts as a second reason to use a sole proprietorship.
As compared to corporations and partnerships, a sole proprietorship keeps your tax accounting simple. A sole proprietorship reports its income and deductions to the federal and state government using a one-page tax form, a Schedule C. The Schedule C tax form, available from the http://www.irs.gov web site, is essentially a simplified profit and loss statement.
Note that many small corporations, limited liability companies and partnerships need to include balance sheets as part of their tax returns. And balance sheets greatly complicate a small business’s accounting and the tax return.
Reason #3: Hiring the Proprietor’s Children
A third reason to consider the sole proprietorship option: A sole proprietor who wants to hire his or her minor children often saves a bundle on taxes. Here’s why: The sole proprietor who hires his or her minor children (under the age of 18) can deduct the amounts paid to the kids as wages. Yet the wages typically aren’t taxable to the kids. (The actual rule is that the wages aren’t taxable as long as the children make less than the standard deduction amount-roughly $5,000 a year.)
And it gets even better: These wages typically don’t ratchet up the business’s payroll taxes because wages paid to minor children aren’t subject to Social Security, Medicare and Federal Unemployment taxes.
Note: A successful sole proprietor with kids who help out in the business could easily save between $1,000 and
$2,000 a year per child by using this tax loophole.
Reason #4: Easier Self-employed Health Insurance Deductions
A fourth reason to use a sole proprietorship concerns the self-employed health insurance deduction.
A sole proprietor can usually easily use his or her health insurance as an income tax deduction.
Furthermore, with a bit of extra paperwork, in some situations, a sole proprietor employing a spouse may be able to deduct all medical expenses as business tax deduction.
To deduct all of the proprietor’s family’s medical expenses as a business tax deduction, the sole proprietor needs to set up something called a healthcare reimbursement arrangement. (Get your accountant’s help if you want to do this-the setup process can be a bit tricky and traps exist for the unwary.)
Note: Corporations, partnerships and limited liability companies can deduct self-employed health insurance, too.
But taking the deduction often gets tricky for small corporations, limited liability companies and partnerships and may be impossible for these sorts of entities. (You can consult your tax advisor for the details.)
Reason #5: Easy Upgradeability
A fifth, final reason to use a sole proprietorship-you can easily later upgrade to a corporation, limited liability company or partnership. Specifically, you can typically turn your sole proprietorship into a partnership or corporation without tax consequences at some point in the future if circumstances warrant.
Accordingly, if at some point in the future, you need to bring in partners or you want to reduce your legal liability by forming a corporation or limited liability company, you should be able to easily do so. (Ask your attorney or accountant for the details.)