When it comes to setting up your own business, one of the first decisions you are responsible for making is what kind of business structure your organization will formally claim. Your choices will depend on several pertinent factors, including how many owners, shareholders or employees will be involved, what the nature of the business is, what its intended purpose and projected plan is, and what type of legal liability you want to be responsible for. Sole-proprietorships are appropriate for those businesses that are owned and run by one singular individual. Unlike corporations or limited liability corporations, there are no complex paperwork filing procedures that you must go through when setting up a sole proprietorship. In fact, it is entirely possible to be involved with the running of a sole proprietorship without even being aware of it. Some freelancers or independent contractors who are self-employed but have not set up their own business with the state may be sole proprietors already. Here are the things you will need to know when getting ready to set a sole proprietorship up.
Am I Already a Sole Proprietor?
It may be the case that you are running a sole proprietorship already, if certain things are true such as the fact that you are responsible for your own taxes, you are an individual, and you are not involved in a limited liability corporation or other type of business. However, it is still important that you take certain steps to register yourself as a sole proprietor in certain states. Since state law varies on the details of this mandate, it is essential that you check with your specific state to determine whether you must formally declare yourself a sole proprietor or not. If you must file paperwork with the state that you reside in as a sole proprietor, then it is likely that you will be able to deal with far less initial setup than a corporation would. As someone who is doing business for yourself, you may be required by your local city or county to file a business license application and receive an employer identification number in order to properly file your taxes, even though your taxes will be due through your own individual entity.
The Benefits and Specifics of Sole Proprietorship
As a sole proprietor, you will not be able to claim any benefits of other business structures such as the perks of limited liability that a corporation enjoys. Therefore, you as an individual will incur the same debts, legal issues and other factors as you as the business. This could become a problem if a client of yours decides to take legal action against you as a sole proprietor, which could lead to you losing your personal finances and possessions or even your place of residence. If this level of liability is an issue and you feel it necessary to gain some protection and separation from your business, a sole proprietorship is probably not the setup for you. You may want to consider the protective benefits of a corporation. You will also be responsible for your own personal taxes as well as any taxes that are due on the income you made as a business. These two types of taxes will be lumped together in the cases of sole proprietorships, and it is likely that you will not have to file separate business taxes. Your own personal tax return and that of yourself as a business entity will be identical, and you will be responsible for including both your personal state and federal taxes and your business taxes on one form. In summary, sole proprietorships can be attractive in that they require much less initial legwork than other business structures. However, they are very limited in the type of legal protection and advantages that they offer to you as a business person.
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