Small business start-ups who are owned by a single person usually create a sole proprietorship, also known as a sole tradership, but is it to their advantage?
Many small businesses are sole proprietorships for several reasons. They are easy to create and require no registration. You can use your social security number instead of a business EIN number. There is no distinction between the individual and the business. It may require a fictitious name submission but if you use your last name in your business name, there is no need to file any paperwork.
Ease is the most common reason for a sole proprietorship. Filing taxes is easier also if you file your own taxes. A lack of money makes a sole proprietorship attractive because you do not need any real investment capital to start. Those running a sole proprietorship like the control they have over their business.
A sole proprietor can still hire employees, but the majority of the time, the employees receive a 1099. This means they are subcontracted and responsible for all their own taxes.
As a sole proprietor, you have access to all the profits. The downside is that you are also held personally responsible for all of the business debts.
One way not to be responsible for all the debts your business may accrue is to incorporate. Incorporation, even if you are a sole owner, puts all business debt on the business and not on your personal finances.
There are many beneficial reasons to incorporate. You can more easily attract investors, look more professional to attract employees, and get the respect all businesses want, making it easier to do business to business transactions. To declare yourself as a corporation, there are several steps you will need to take to make your business a legal entity within the United States.
The two types of corporations are S Corp and C Corp. With an S Corp type corporation, only shareholders pay taxes. They are limited to 100 shareholders who are US citizens. Owners can only get common stock which come with voting rights. With a C Corp type of corporation, the business pays taxes and the shareholders pay taxes on the money received. There are no limits on shareholders nor limits on country of origin. Owners have the right to preferred stock. Theory gets no voting rights but gets priority to dividends before common shareholders.
LLC is also an option for a corporation. LLC’s are also not personally responsible for business debts, but it is not a shareholder venture. Instead, owners are considered members and their business interests are declared as membership interests instead of shares.
After you select your type of corporation, then you must file your fictitious name in the state where you may primarily operate. Select a board of directors as outlined in the laws of creating a corporation. Choose whether you will offer preferred stock or common stock, whichever best suits your needs. Obtain your certificate of incorporation. File your corporation in the state of your choice, which can be done with a lawyer or a verified third party service.
In conclusion, both sole proprietorships and corporations have their benefits. To avoid being personally responsible for business debts, incorporating is definitely the best option. For ease of starting a small business with no employees and no registration, then a sole proprietorship is the best course of action, even if you will be responsible for all business debts accrued on a personal level. If you plan on expanding, hiring employees, offering stock for shareholders, and looking more professional, then start out as a corporation from the beginning.