Major Attractions of a Sole Proprietorship

by Mark Kennan
    Sole proprietors pay taxes on business income on their personal tax returns.

    Sole proprietors pay taxes on business income on their personal tax returns.

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    A sole proprietorship is an informal business structure often used by people just getting started. Despite the drawbacks, such as unlimited liability, many people choose to operate their businesses as sole proprietorships. Before rushing to incorporate, make sure you consider the advantages a sole proprietorship offers because you can always incorporate at a later date.

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    Minimal Organizational Requirements

    When you start a sole proprietorship, you don't have to register your business with the state as you would if you were forming some other type of business entity such as a corporation. However, you may still need to obtain certain licenses, depending on your business. For example, operating a doctor's office as a sole proprietorship means that you don't have to register the company, but you still need a medical license. In addition, in most cases, you also don't need to have separate business and personal accounts. While it may be useful for your own record keeping purposes, you aren't going to have legal issues if your business and personal funds are kept in the same account.

    Lower Business Costs

    Starting a sole proprietorship has very few costs, so you can spend your money on what really matters -- developing your business. In addition, you don't have to file any annual reports or pay franchise taxes to the state each year. Most states impose these taxes and filing requirements only on organizations that are officially organized or chartered; these include corporations, limited liability corporations and limited liability partnerships.

    Business Flexibility

    As a sole proprietor, you're the boss. You don't have to worry about jumping through any corporate hoops or consulting with other owners because you have full ownership of the company. If business goes well, you have the flexibility to bring on additional partners in the future or to sell your business without having to worry about getting your co-owners approval. Alternatively, if things don't go so well, you can end the business whenever you want.

    Tax Filing

    As a sole proprietor, you include the income or losses from your business on your personal income taxes. Your sole proprietorship income is reported on Schedule C and then the net profit or loss carries over to your Form 1040 tax return. If you have a net loss, you can use your sole proprietorship income to offset other income and reduce your total tax liability. If you incorporated your business, the corporation would have to file a separate corporate tax return.

    About the Author

    Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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