New Venture Lab: Equipping Christian Entrepreneurs

Question

Can you please tell me more about Sole Proprietorships?

Answer

Description: A sole proprietorship is the structure used for most small business, at least at the beginning of their life.  A sole proprietorship is usually owned by the person that exercises day-to-day control over the company and is, for liability, profit and tax purposes, considered commingled with each other as an individual tax payer and as a business entity.  These business entities are usually transitioned to one of the other types of entities once the business is fully established and the company experiences more risk exposure, employs more employees or raises outside capital.

Advantages:

• The structure is easy to start up and easy to shut down with the least amount of expense
• The sole proprietor/owner receives all income, which is taxed as personal income
• The sole proprietor/owner has full control and ownership

Disadvantages:

• The sole proprietor/owner is personally liable without limit for any liability or debt against the business and have exposure to risk on all of their personal property and assets
• The sole proprietor/owner usually cannot raise outside venture capital without switching to a C corporation structure
• The sole proprietor/owner cannot share ownership in the company with family members or employees
• The sole proprietorship structure has some limits on the deductibility of certain types of employee benefits

Required Tax Forms:

• 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 4562: Depreciation and Amortization
• Form 8829: Expenses for Business Use of your Home
• Employment Tax Forms