Should I do business as a Corporation or Sole Proprietor?
Considering whether you should incorporate or do business as Sole Proprietor is an
important question to answer before starting a business of your
own. Incorporating under any form of
entities has its advantages and disadvantages; some of the points to consider in
answering this question include:
Operating a business as Sole Proprietor does not require
any federal filing whatsoever, unless you elect to obtain a tax ID instead of
using your Social Security number. Furthermore, there is no state filing
requirements (in most states), except for obtaining a sales & use tax permit if
needed (for retail sales or providing taxable services), and unless you elect to
do business and operate under an
assumed name, there is no locality filing requirements. Assumed name "DBA" requires registration of such name at the county level in order to obtain
exclusivity to the use of such name within the county. Please note, that in most states,
an assumed name registered at the county level would not prevent a
corporation from using the name, since the registration of a corporate name is done at
the state level.
Under "Sole Proprietorship" all of the business net income will be subject to
a 15% Self Employment taxes. Under a "Pass-through"
entity (such as S-Corp, LLC, etc.), only the portion allocated to you as an income can be subject to
employment taxes, while the other part can pass to you as a net profit and/or
loss not subject to self employment in a K1 Schedule.
Under "Sole Proprietorship" you will report your income
in a Schedule-C; which is a business return within your 1040 individual tax
return. Such returns are subject to a higher level of scrutiny and they will bring
additional burden and complexity to your individual tax return. Schedule-Cs are
particularly examined by the SB/SE unit of the Internal Revenue Service
which is specifically
designated for the self-employed and small business.
Read more about Tax Planning for
Business
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Liability and Credit Issues:
Under "Sole Proprietorship" you personally will, and can
be held financially liable should you be sued in the course of business for any matter
related to your business, including
misrepresentation, wrongful acts, product liabilities, etc. If you are sued
and found guilty, people can go after your personal assets such as your
home, 401K, savings, etc. Such liability will be limited to the corporate assets
if you conduct business under the protection of corporation. Please note that
under certain circumstances you may still be held liable in personal assets,
even if you do business as a corporation - we highly recommend that you consult
a lawyer for more details about this subject.
Under "Sole Proprietorship" should you require credit, your personal credit
is what can be used. Using your credit for business purposes will place
you in violation of almost all credit card issuer agreements unless the credit card or the line of credit was
originally designated "for business use."
Several small corporations, and almost all major
businesses are unlikely to do business with individuals in order to maintain certain
Insurance and Credit provisions mandated by most
underwriters. Doing business with individuals is presumed to have higher risk factors. Under
"Sole Proprietorship" you are unlikely to get a "reasonable" credibility for
obtaining sizeable accounts.
Accordingly, unless you expect your business to remain
extremely small ($25,000 or less in profit with no employees), it is
suggested that consider the idea of doing business in a form other than Sole Proprietorship.
The information contained in this page is NOT a legal opinion, nor it is
intended to provide legal guidance to the general public. Legal opinion must be
obtained ONLY from a licensed Attorney.
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