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SOLE PROPRIETORSHIP
"...We Gravitate to the Level
of Our Own Laziness!"
Have you ever heard of this expression? When you
think about it, the Sole Proprietorship is just that – it is either laziness, or
you just don’t know.
Operating a business as an Sole Proprietor is
basically the default entity. You don’t have to do anything, such as
filing paperwork with the state or create any documentation such as a
partnership agreement. A Sole Proprietor is basically opening up shop on your
own. You can basically do business under your own name or setup a DBA /
Fictitious Business Name and operate under that name. Now, if you can imagine,
there are a lot of individuals that are operating as SP. The disturbing fact is
that operating as a SP is universally not the best choice out there.
The Advantages of a Sole Proprietor are:
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Easy to start up
- You really don’t need anything, not even a Fictitious business
name. There are no legal
costs, there is no paperwork to file such as Articles of
Incorporation with the state.
You are basically self-employed.
Any money that you personally make, you report it on your
1040 and Schedule C profits and losses.
You cut a check to the IRS for taxes due and you’re on your
way. No Formalities to maintain, no meetings to hold, no
organizational documents to draft and file (unlike any other
business entity).
-
Fictitious
Business Name – Again, you really don’t need a DBA.
You can be operating your business as John Doe or as Jane
Doe. But if you want to
operate under a different name, such as John's Garage Shop, then
you’ll need to file a fictitious business name statement with the
county. However, one thing
you have to understand – a Fictitious Business Name (FBN) is not
considered a separate entity.
You and the business are essentially one and the same.
Therefore, you do not receive limited liability protection.
The
Disadvantages of a Sole Proprietor are:
-
Raising
Capital - You’re going to have limited ability to raise capital.
If you’re looking to be funded, you shouldn’t be operating
under your own name or DBA.
When someone looks at a Corporate name or LLC name, there is more
credibility to be given because the owners actually took the effort
to setup a separate business entity.
It’s not one of the biggest factors, but it’s there.
-
Self-Employment Tax – everyone one of you out there, if you’re
self-employment, is paying self-employment tax – 15.3% to be
precise. That is on top of
any income tax that you may owe.
As a SP, you’re basically paying your 15.3% on your total
earnings. So, if you made
$100,000 last year (after appropriate deductions you might have),
you’ll be paying $15,300 just in self employment tax.
That’s not including any income tax that you may also owe.
This is one of the big reasons why businesses form
corporations and LLCs – they are able to pay less in self-employment
tax. The way it works is
this: say if you made the
same $100,000 as a Corporation.
You could be paying yourself $50,000 as a salary and $50,000
in dividends. Now, SE Tax is
a payroll tax. You’re only
being taxed on the salary you receive.
So, SE Tax would be based on the $50,000 salary.
The other $50,000 is being paid as dividends.
Therefore, only regular income tax rules would apply there.
No SE Tax would be assessed against your dividends portion.
That is why you see a lot businesses form corporations and
LLCs – this is one of your tax saving advantages.
I’m sure Mark will have a few more reasons why you should
incorporate from a Tax savings standpoint.
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Unlimited
Personal Liability – now, the biggest reason why we setup
corporations and LLC is for Limited Liability.
Operating as an SP, you have unlimited personal liability.
Your personal debts are your business debts, and your
business debts are your personal debts.
Therefore, if you receive a court judgment though your
business (i.e., you breached a contract, or someone got injured on
your premises), they can attach any bank accounts you may have,
place a lien on your home, seize other assets you may have.
You and the business are essentially on and the same.
Even filing a FBN doesn’t give you the limited liability
protection a Corporation gives you.
Because no
difference between Personal and Business assets, the sole proprietor
risks everything they have every single business day - Homes,
other real estate, cars, furniture, cash, bank accounts, investments!
Moral of the story is – if you’re going to run a business, set it up
correctly! Form a Corporation or LLC.
We invite you to discuss your business
with us. We can help protect you and your family! Call now for
a free consultation. You may reach our office at (310)205-5529.
Remember...Failing to
Plan is Planning to Fail!
LAW OFFICES OF ALON DARVISH
9454 Wilshire Boulevard, Penthouse
Beverly Hills, CA 90212
Tel: (310)205-5529
SERVING LOS ANGELES COUNTY
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