One of four-What Entity should I choose for my Business?

One of four-What Entity should I choose for my Business?

August 01, 2021

Choice of entity? You have 4 choice and you have decided on Sole proprietor. Now what?

You have decided on a sole proprietorship one of 4 entities, Sole Proprietor, Corporation, LLC/LLP, and Partnerships you can choose when you decide to start a business.

What Is a Sole Proprietorship?

A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business. Income minus expenses the net is taxable not the owners draw. You do not have payroll you must pay self-employment tax on the net profit. What is self-employment? Self -employment is social security plus Medicare both the employer and employee portion. 

A sole proprietorship is the easiest type of business to establish or take apart, due to a lack of government regulation. The sole proprietorship is the most common form of business organization. As such, these types of businesses are very popular among sole owners of businesses, individual self-contractors, and consultants. Many sole proprietors do business under their own names because creating a separate business or trade name isn't necessary.

Understanding Sole Proprietorship

A sole proprietorship is very different from corporations (corp.), limited liability companies (LLCs), or limited liability partnerships ( LLPs), in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

For example, the debts of the sole proprietorship are also the debts of the owner. However, the profits of the sole proprietorship are also the profits of the owner, as all profits flow directly to the business's owner.

The main benefits of the sole proprietorship are the pass-through tax advantage mentioned before, the ease of creation, and the low fees of creation and maintenance. The disadvantages of a sole proprietorship are the unlimited liability that goes beyond the business to the owner, and the difficulty in getting capital funding, specifically through Banks, Credit Unions, Loan companies, such as issuing equity and obtaining bank loans or lines of credit.

Thus, entrepreneurs begin as an entity with unlimited liability. As the business grows, they often transition to a limited liability entity, such as an LLC or LLP, or a corporation—e.g., S Corp, C Corp, or Benefit Corp.

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Lillian Meyers CFP®, CDFA®, EA is a Tax Specialist, financial planner in North Bay Area, California helping clients live their best life through the use of financial planning, investment management, and other sophisticated financial options.