Should You Be A Sole Proprietor?

June WalkerOur dear friend (and partner and speaker again at this year’s CFC), June Walker, has generously shared excerpts from her new book, The Confident Indie: A Simple Guide to Deductions, Income and Taxes for The Creatively Self-employed.

She’s also offering a special discount to readers: use promo code, “Confidence” and get 15% off anything on her web site through June 30! Do that now and come back to read the book excerpt!

The Characteristics And Advantages of A Sole Proprietorship

  • You and your business are one and the same.
  • A sole proprietor and his business use the same tax year.
  • Its income or loss is your income or loss. (This is referred to as pass-through, which we’ll look at in a moment.)
  • Its debts and assets are your debts and assets.
  • Assets, originally for personal use, can immediately be used in your business without paperwork and without negative tax consequences. And, there can be positive tax consequences without any cash outlay.
  • It’s the easiest, quickest and cheapest business structure to set up and maintain with regard to recordkeeping, accounting, legal procedures and fees.
  • The most flexible business structure is a sole proprietorship.
  • It is the only business tax entity that does not require a separate tax return. A federal Schedule C: Profit or Loss From Business and a few other pages are added to your personal tax return. These pages show the income and expenses of your independent endeavor.
  • Only a sole proprietorship allows for a simple, direct deduction of home office expense.
  • A business loss can immediately reduce your other taxable income.
  • Taxes are not paid twice on the same income – as can happen with a corporation.
  • Recent tax law changes have made sole-proprietorship the most tax-advantageous pass-through tax structure for a one person business.
  • A sole proprietorship allows for the most advantageous tax remedy when husband and wife work in the same business.
  • It is easy to change from a sole proprietorship to another business structure – such as a partnership or corporation – when your situation warrants it.

Three Disadvantages of Being A Sole Proprietor – And Three Antidotes

  1. You are personally liable. Yes, they can take your house if your massage oil gave someone a skin rash that ruined her performance at the piano competition and so destroyed her future earning potential. Antidote: Get adequate liability insurance appropriate to your business activities and assets. Insurance can be much less expensive than incorporating.
  2. And the reverse: Business assets can be confiscated to pay personal debts. Yes, they could take your computer if you owe money on your credit card or to your dentist. Antidote: Watch your spending.
  3. Audit rates are higher than for other business entities. Antidote: Don’t flinch. Good records will get you through an audit. The confident indie who keeps good records will lead the way.

You may learn more about business structure at cover

Excerpt from The Confident Indie: A Simple Guide to Deductions, Income and Taxes for The Creatively Self-employed. CHAPTER 5: THE MOST SIMPLE BUSINESS STRUCTURE

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