Since I talked about S corps in my last blog post, let’s talk about the simplist type of business entity – the sole proprietorship.
A sole proprietor is easy to set up – you essentially start doing business as yourself. You ARE your business. Hang out your shingle and get to work!
Many business owners like it because there’s little set up. However, a sole proprietorship has a number of drawbacks. It cannot be inherited, so if you want to leave your business to your heirs, you can’t with this business entity setup. You also can’t sell it.
The largest concern with sole props is the liability risk. I’ll talk more about that in my post on LLCs, but as a sole proprietor. there are no protections in the event of an adverse event such as a lawsuit. Especially a lawsuit. You and your business are one and the same so if you are taken to court, your personal assets as well as those of the business are at risk.
We file sole proprietorships on Schedule C of the individual tax return. All expenses incurred in the pursuit of growing revenues can be deducted (within reason) just as with any other business. If you’re wondering, the IRS definition of a deductible business expense is that it must be in the “normal and ordinary” course of doing business.
A sole proprietorship may be appropriate for business owners who are just getting started and not ready to make the leap to a more formal business entity type.
Not sure if a sole prop is for you? Make sure you talk to an attorney or tax professional. You can reach us at 801-692-0032.
Donna Harris holds a BSci in Accounting and is the owner of Bookkeeping Made Simple.
Donna Harris, BSci Accounting, MBA, founded Bookkeeping Made Simple with the understanding that small businesses is the heart of the American economy. After offering to do books for a friend who said he didn't have enough work to keep someone in the office 20 hours a week, she recognized the need for an efficient, online system. She has 20 years of bookkeeping and accounting experience and is excited to help small business owners achieve their goals. She enjoys spending time with her family and traveling whenever possible. She also loves reading, hiking, camping, cooking, yoga, and fitness. A huge believer in lifelong education, she is currently working on her master's in Accounting.