Choosing Between Corporation Or Sole Proprietor When Starting A Business

It is important to consider the potential tax and legal issues when starting a business. Most people choose a “sole proprietor” as their business type when starting out. If you start your business as a sole proprietor, then this does not require any special paperwork from the IRS.

Most people start out this way because of this very reason. If you are a sole proprietor, then this would mean that you and the business are one and the same.

A sole proprietorship is an unincorporated business that is owned by one individual and this is according to the IRS. It is also considered as the simplest form of business organization to start and maintain. There is no existence in the business apart from you, the owner. Your personal liabilities are its liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. The income and expenses of the business is what you include on your own tax return.

However, even though a sole proprietorship is the simplest way to set up your business, you still need to follow your local business regulations to make your business legitimate. Paying both income taxes and business debts is something that you are personally responsible for as well.

So, is being a sole proprietor the right business structure for you?

In the beginning, the answer is yes for most home business.

If you choose to start your business as a sole proprietor, you do have the option of incorporating as your business grows.

Find out the difference between a sole proprietor and corporation.

A corporation, unlike a sole proprietorship, is a legal entity in which the individual and business are separate. The great thing about incorporating is that the corporation protects you from personal liability for business debts. For instance, for the most part your personal assets are safe if your business gets sued.

Being able to save a significant amount of money in taxes is also possible by incorporating.

There are several options if you decide to incorporate.

S Corporation
The C Corporation
LLC (Limited Liability Corporation)

It is a good idea to check with the IRS and your tax professional first before incorporating.

It may not be right for your business to set up a corporation and it is more complicated as well.

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