Should I Become a Sole Proprietor?

When you are setting up a business for the first time, one option you have is to run your business as a sole proprietorship. One of the reasons that many choose this route is the simplicity of setting yourself up as a sole proprietor. Yet, it may not be the best option for starting your business, so make sure you understand the benefits as well as the drawbacks before you choose this option over the alternatives.

A sole proprietorship is automatic for people who do jobs on a freelance or contract basis and do not take the time to set up another business structure. If you are not an employee, then the IRS automatically views you as a sole proprietor, without your having done a thing. If you want to structure your business differently, you will need to take some steps to do so.

As the owner of a sole proprietorship, you will be held personally responsible for business debts and liabilities. This is one reason many people choose to register as something else, particularly if their line of work has a high level of risk. It is simply not worthwhile to take on that risk personally. However, some professions, such as freelance web design, do not carry much risk, making this less of a drawback.

Tax Considerations

As a sole proprietorship, your business will be registered on your personal income tax form using Schedule C. You must pay all self-employment taxes, rather than having these taxes withheld and paid by an employer. You may even need to pay estimated taxes if your income is high enough. Legally, you personally are responsible for these taxes, no matter how high they are, and the IRS can come after you if you do not pay up.

Costs of Running a Sole Proprietorship

To run your business as a sole proprietorship, you will not need to register with the IRS. This makes it more affordable than other business structures. However, most states and cities require these businesses to operate under a business license and to register their businesses. This can bring a small cost, but it is far less than setting up one of the other business structures through the IRS. This is the primary benefit of remaining a sole proprietor – you will not have the costs of establishing another business structure, and can use that money to run your business.

So, is a sole proprietorship right for you? The answer depends on whether or not you are comfortable taking on that liability personally. If your business carries little risk or you are completely comfortable with the liability you would need to shoulder, then this is the most affordable way to run it.