Choosing an Entity : Sole Proprietor
When you first start out in business, you often don’t think about things like choosing a business entity.
The very act of not choosing an entity (ie being a “sole proprietor” is making such a choice. And it’s important that you understand what you decide can make a big difference on how you are taxed, your personal liability in the business, and more.
There are a number of forms of entity that you can use for your blogging business. We’ll start with the simplest, cheapest, and most problematic form.
Sole proprietor
Sole proprietors run their businesses as an extension of themselves, even if they have a name for the business, etc. If you do have a business name different from your own, be sure that you are following your local laws regarding filing fictitious business names (or “DBA”). That being said, a sole proprietor reports their income and expenses, usually, on Schedule C. This is an additional form that you submit with your 1040 form to the IRS.
Advantages of being a sole proprietor include:
1. Simplicity — you don’t have to file forms with the state, or IRS, to become a sole propietor.
2. Lower costs — you don’t have to file separate tax returns for your entity; it’s all on Schedule C.
3. Lower taxes — almost all states charge a minimum tax for a corporation or LLC to operate in their state; all the hoopla about “saving taxes by incorporating in Nevada”, for a lot of people, is just that — if you live in California, for example, your “Nevada corporation” is still subject to the tax laws of California including the minimum taxes.
Disadvantages
1. There’s often a tendency of sole proprietors to not separate their business income and expenses from their ordinary income and expenses. Sloppy record-keeping is a danger to all businesses, but it’s more prevalent among sole proprietors. The IRS realizes this, and in our experience, they are more likely to examine Schedule C filers than those who form corporations or other entities that are required under state law to keep a general ledger and other official records.
2. You cannot easily expand the business to include other people. People who invest in your business will want to be issued shares, or enter into partnership agreements with you. If you are thinking of some day expanding the ownership of your company, you’ll need to set up a new entity.
3. Legal liability — a sole proprietor is legally liable for everything they do. Debts, libel, accidents and more can expose the sole proprietor to personal liability. While another form of entity doesn’t necessarily eliminate or reduce liability, it can be useful.
Tags: 1040, blogger taxes, choosing an entity, IRS, sole proprietor, taxes