Using a Sole Proprietorship for Your EBusiness
The Advantages and Disadvantages of Being a Sole Proprietor
Starting a Sole Proprietorship
A sole proprietorship is the easiest way to found your own company. All you need to do to found a sole proprietorship is to “hang your shingle” – in other words, simply start doing business. Although you may need licenses, permits, or other permissions depending on the laws in your area or the type of business you are doing, you do not need to register with any federal or state organization.
If you receive money for doing business, you automatically have a sole proprietorship, whether you know it or not. For example, if you are a freelance writer or photographer, an independent contractor, or even a part-time babysitter, you have a sole proprietorship unless you have otherwise registered your company.
Taxes and a Sole Proprietorship
For the purpose of taxes, there is absolutely no difference between you and your company with this type of organization. Business income is filed like personal income, on a 1040 form, with the slight change that you will also need to submit an additional schedule (usually Schedule C – Profit or Loss from Business).
If you are filing taxes as a sole proprietor, remember that you will be responsible for your own tax withholdings. If you are an employee of a company, this is usually handled for you, so this might take some adjustment.
In addition, you will need to pay a self-employment tax, which covers your contributions to Medicare and Social Security. If you have hired any employees, you will also need to pay employment taxes.
Additional information can be found at the IRS website: http://www.irs.gov/businesses/small/art
Sole Proprietorships and Personal Liability
Sole proprietorships are simple, inexpensive, and easy to manage, which makes them attractive for many people who are getting ready to start an EBusiness. However, sole proprietorships also have a major disadvantage.
In the same way that you are indistinguishable from your business for purposes of taxes, you are also indistinguishable from your business for purposes of liability. That means that if your company is sued or if it goes bankrupt, your EBusiness’ debtors may go after your personal belongings as well as your business assets.
This makes a sole proprietorship the most risky category of business organization. A mistake with your EBiz can cost you your house, your car, and all of your worldly possessions.
In short, a sole proprietorship is a fast and easy way to get started running your own EBusiness. However, you are taking all of your company’s risks squarely on your own shoulders. For more protection in case anything goes wrong, you should look into forming an LLC or a corporation.