Getting started in a business is a challenging and exciting time. Many new businesses are set up as a sole proprietorship. This basic form of business entity is very easy to start, requires almost no paperwork, and has the simplest records requirements. It is also the form chosen by many people who have been making money at a hobby, and want to turn their hobby into a real business.
If you are thinking about starting a business as a sole proprietor, take a look at some of the advantages and pitfalls of this business type:
- Start up costs are very low.
- Income generated by the business is YOUR income.
- You control all the functions of your business.
- You don’t file separate tax returns for the business – the business information is part of your personal tax return.
- You may or may not have employees.
- You can sell or close your business at any time. You can even pass it down to your children.
- Banks are very reluctant to give loans to sole proprietors. See the list of benefits above. Since you can close your doors at any time, you are seen as a business risk.
- YOU are personally liable for any debt incurred by your business. If your business is sued or someone gets hurt as a result of your business, your home and personal assets are at risk.
- As your business becomes profitable, your personal tax obligation increases.
- Health insurance for your employees is not deductible.
- If you die, your business ceases to exist. All assets are liquidated and become part of your estate. Your family could be burdened with large estate or inheritance taxes.
- Sole proprietors are four times more likely to be audited than other business forms.
For some businesses, being a sole proprietor makes perfect sense. Bookkeepers, small housekeeping services, tutors and freelance writers come to mind as businesses perfect for the sole proprietor model. For many businesses, other forms could be a better choice.
For new (and existing) business owners in our area, Hampton Roads Accounting meets with prospective clients to discuss their business plans and needs. Together, we can take a look at your business idea, discuss which business form would be best for your situation, and plan your next steps to make your business dream a reality.
There is no cost or obligation for this initial consultation, so give us a call, send us an email, or complete the form on our website to get started. We’ll be in touch right away.
Hampton Roads Accounting focuses on helping small business owners in the following cities: Chesapeake, Virginia Beach, Norfolk, Portsmouth, Suffolk, and the surrounding area.