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Small
Business Tutorial
Most
entrepreneurs aren't sure whether they can safely
operate as a sole proprietor or whether they need
the protection of a corporation. The most common
business structures are described below along
with instructions for registering each type of
business.
SOLE
PROPRIETOR, PARTNERSHIP
OR CORPORATION?
SOLE
PROPRIETORSHIP
A sole
proprietorship is the easiest and most inexpensive
form of business. A sole proprietorship involves
only one person (you) and ceases to exist should
you die or become incapacitated. Under state
law, anyone who starts doing business, even without
registering a business name, is automatically
considered to be a sole proprietor.
Advantages
of Sole Proprietorship:
In addition to the simplicity and low cost of
operating a sole proprietorship, all business
losses of a sole proprietorship are deductible
from your personal income and, if your income
is small, the tax you pay on your business income
will be low.
Disadvantages
of Sole Proprietorship: Under
state law, there is no distinction between
you (i.e. your personal assets) and your sole
proprietorship. Any business liabilities or losses
are considered to be your personal liabilities
and losses, and you could be forced to pay business
debts out of your personal, non-business assets.
For this reason alone, many small business owners
chose to incorporate, thereby raising the corporate
veil and protecting their personal assets from
any liability or debt associated with the business.
Alternatively, some sole proprietors may register
assets in their spouse's name so that business
creditors cannot reach the assets. The obvious
disadvantage of this approach would be the risk
of the spouse leaving and the sole proprietor
no longer being able to reach the assets. Another
disadvantage of sole proprietorship would occur
if your business did very well. If taxable income,
including business income, was higher than an
amount determined by the Internal Revenue Service, tax on income over
that amount would be paid
at the highest personal rate
Remember:
you can always change the status of your business
to suit your changing needs.
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