Small Business Advantages and Disadvantages

Small Business Advantages and Disadvantages

Sole Proprietorship: Advantages and Disadvantages

Small Business Advantages - When starting a business it’s important to take the time to review your personal and business objectives by developing a business plan. What should emerge are answers to questions like:

  • Do you want investors as shareholders in your company?

  • Do you want to maintain control of the company if you have investors involved? Do you anticipate losses in the early stages that can be taken as tax benefits by shareholders?

  • Do you want to avoid double taxation? Is there a great risk of liability associated with your specific business?
Think through these questions carefully since your answer to each will help guide you to the right structure and steer you away from the wrong one.

To help you determine the best structure for your business, we’ve put together an overview of several options. And remember, it’s always best to work closely with an attorney and/or accountant to ensure you make the right choice. When you start a new business, you must decide on a legal structure. Understanding the advantages and disadvantages Usually you will choose either a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. There's no right or wrong choice that fits everyone. Your job is to understand the advantages and disadvantages of each legal structure and pick the one that best meets your needs. The best choice is not always obvious. After reviewing this section, look over advantages and disadvantages at Business Formation.

Selecting Your Business Form: Sole Proprietorship

Sole Proprietorship
The majority of all small business start out as sole proprietorships. These firms are owned by one person, usually the individual who has day-to-day responsibility for running the business. Sole proprietors own all the assets of the business and the profits generated by it. They also assume complete responsibility for any of its liabilities or debts. In the view of the law and the public, you are one in the same with the business.The owner needs to secure the necessary licenses, tax identification numbers, and certifications in his or her name, and you are now in business.

Sole Proprietorship Characteristics
The prevalent characteristic of a sole proprietorship is that the owner is inseparable from the business. Because they are the same entity, the owner of a sole proprietorship has complete control over the business, its operations, and is financially and legally responsible for all debts and legal actions against the business. Another aspect of the "same entity" aspect is that taxes on a sole proprietorship are determined at the personal income tax rate of the owner. In other words, a sole proprietorship does not pay taxes separately from the owner.

A sole proprietorship is a good business organization for an individual starting a business that will remain small, does not have great exposure to liability, and does not justify the expenses of incorporating and ongoing corporate formalities.

Small Business: Sole Proprietorship: Advantages

  • Easiest and least expensive form of ownership to organize.
  • Sole proprietors are in complete control, and within the parameters of the law, may make decisions as they see fit.
  • Sole proprietors receive all income generated by the business to keep or reinvest.
  • Profits from the business flow-through directly to the owner's personal tax return.
  • The business is easy to dissolve, if desired.

Sole Proprietorship: Disadvantages

  • Sole proprietors have unlimited liability and are legally responsible for all debts against the business. Their business and personal assets are at risk.
  • May be at a disadvantage in raising funds and are often limited to using funds from personal savings or consumer loans.
  • May have a hard time attracting high-caliber employees, or those that are motivated by the opportunity to own a part of the business.
  • Some employee benefits such as owner's medical insurance premiums are not directly deductible from business income (only partially deductible as an adjustment to income).

Federal Tax Forms for Sole Proprietorship

  • Form 1040: Individual Income Tax Return
  • Schedule C: Profit or Loss from Business (or Schedule C-EZ)
  • Schedule SE: Self-Employment Tax
  • Form 1040-ES: Estimated Tax for Individuals
  • Form 8829: Expenses for Business Use of your Home
  • Form 4562: Depreciation and Amortization

Small Business Advantages
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