Welcome to the business entity dating competition. The are are five contestants:

1. Sole Proprietorship
2. General Partnership
3. Limited Partnership
4. Limited Liability Company (LLC)
5. Corporation

Starting a business is a big first step. However, choosing a business entity can make or break your business.

So, get to know these contestants well. Get a feel for what match suits your business needs the best.

Don’t worry if you’re just getting started or looking to change your existing business entity. Just like in the dating world, you can divorce, break up, get married, etc. So, you can change your business entity at any time.

Let’s meet our first contestant.

About Me

What is a sole proprietorship?

Short Bio: Hi, I’m a sole proprietorship, which is a business that doesn’t have a separate legal identity from its owner. So, I tend to get my identity wrapped up in anyone I’m dating. Basically, the business owner and I are the same person.

Job status: I’m self-employed. As a sole proprietorship, I’m not taxed separately from the owner. So, when tax time rolls around, the sole proprietor will file an IRS Form 1040 and Schedule C. The sole proprietor will have to report how much they gained or lost for that year, which is reported on the Schedule C form.

What is a sole proprietor?

A sole proprietor is someone who owns a sole proprietorship. They must pay the following taxes:

• income tax
• self-employment tax
• estimated tax
• Social Security and Medicare taxes
• income tax withholding
• federal unemployment tax
• excise taxes

Can a sole proprietorship have 2 owners?

No, I work alone. A sole proprietorship can only have 1 owner.

Personal History

Formation of Sole Proprietorship

A sole proprietorship is the simplest form of business ownership, because you don’t have to file any formal paperwork with the Feds or the state to create a sole proprietorship.

That’s why I’m considered easy.

Examples of proprietorship

If you’re working for yourself and running a business, then you would qualify as a sole proprietor. Some examples of a sole proprietor include a freelance writer, business consultant, or independent contractor.

You can apply for an employer identification number (EIN) if you want to look official. However, it’s not required. So, you can just use your Social Security Number (SSN) when filing taxes.

Also, if you’re running a business that requires a business license or permit, then you will need to get a permit or license to make your business legit. Each state has its own rules. So, you should check the rules of your state and/or industry to verify if this applies to you.

Likes & Dislikes

👍Advantages of Sole Proprietorships:

• Business owners can use a fake name for their business. Yes, it’s true. I didn’t make it up. A sole proprietor can operate under a different name if the sole proprietor files a “doing business as” (DBA) name. Keep in mind you may need to register your DBA with your state’s Secretary of State (SOS).
• The cost to start a sole proprietorship is inexpensive.
• The sole proprietor is the sole owner and has complete control over the business’s management and operations.
• The sole proprietor doesn’t need to file a separate business tax return. Only Form 1040 and Schedule C need to be filed.

👎Disadvantages of Sole Proprietorships:

• The liability of owners in a sole proprietorship is unlimited. So, an owner’s personal piggy bank can be snatched away in a lawsuit. The sole proprietor is also financially and legally responsible for any money the business owes, e.g., debts, loans, etc.
• To make matters worse, a sole proprietor’s personal’s assets are at risk if an employee causes a lawsuit against the business. Personal assets can include your house, personal bank account, car, etc.
• A sole proprietor can’t sell stock in the business to raise money for the proprietorship.
• A proprietorship is a business that doesn’t last forever. So, if something happens to the sole proprietor, then the business will not survive.

The Competition

Sole Proprietorship vs LLC

The biggest difference between a single-member LLC and a sole proprietorship is legal protection. A single-member LLC’s personal property will be legally protected if the LLC is sued.

Changing from sole proprietor to LLC would require registering your LLC with your state’s Secretary of State.

Sole Proprietorship vs Corporation

One of the main differences between a sole proprietorship and a corporation is its immortal status. So, a corporation doesn’t end when its owners (or shareholders) die. The owner’s personal assets are also safe if the corporation is sued.

Also, moving from a sole proprietorship to a corporation requires you to register your business.

Hobbies

Fine print: yes, I have to do the whole disclaimer thing. I’m not a tax professional. Please do your research and consult a tax professional to address your specific situation.

Sole Proprietorship Taxes

Self-Employed Income

Self-employed income is income earned while performing a trade or business. The IRS will consider you self-employed in the following situations:

• Perform a trade or business as a sole proprietor or an independent contractor
• A member of a partnership that performs a trade or business
• Work for yourself (includes a part-time business)

Self-Employed Tax Responsibilities

As a sole proprietorship, I’ll make you money—hopefully. However, we have to share our money with the IRS.

If you’re self-employed, then the IRS requires you to file a tax return every year and pay quarterly estimated taxes.

Generally, you must pay both self-employment tax and income tax. Self-employment tax is usually a Social Security and Medicare tax for self-employed people.

So, it’s similar to the Social Security and Medicare taxes withheld from employees’ paychecks. Keep in mind that “self-employment tax” only refers to Social Security and Medicare taxes and not any other tax, e.g., income tax.

To determine how much you need to pay Uncle Sam, you would need to figure out how much you made or lost from your business. So, you would subtract your business expenses from your business income to figure out your profit or loss.

If you made more than you lost, you would report the income on your 1040. If your business lost money, then you can possibly deduct that loss from your total income. However, there may be limits as to how much you can claim as a business loss.

Uncle Sam will have his hand in your pockets if your business made more than $400. However, you may still need to file a tax return if you made less than $400, as described in Form 1040 and 1040-SR instructions.

Other Income

Keep in mind that you may need to report other income on your Schedule C. Other income includes any income that wasn’t earned from your business.

For example, if you like to hit the slots in Vegas, you would report any winnings on Form W-2G.

Here are some examples of other income:

• Jury duty payment
• Hobby income and expenses
• Prizes and awards
• Trusts
• Royalty income
• Any other Forms 1099 received
• Alimony payments that were paid or received with the ex-spouse’s name and SSN

Gross Income

A business must report all income it received, which includes the following:

• Payment for services, e.g., fees, commissions, fringe benefits, etc.
• Money earned in your business
• Property tax gains
• Interest
• Rent payments that your receive
• Royalties
• Dividends
• Annuities
• Life insurance money and endowment contracts (type of life insurance policy)
• Pensions 
• Income from discharge of indebtedness (no longer required to pay certain debts)
• Distributive share of partnership gross income (income received in a partnership)
• Income in respect of a decedent (untaxed income that a deceased person earned or had a right to earn during their lifetime)
• Income from an interest in an estate or trust, except exclusions

Business Expenses

A business expense is any ordinary and necessary expense that the sole owner needed to operate their business.

Some examples of business expenses include:

• reasonable salaries and payment for services
• traveling expenses
• rent, e.g., office space

Home Office Deductions

If you’re just getting started, chances are that you will work out of your home.

 A home office is any part of the proprietor’s home that is used for operating the business.  So, you’re not limited to only using office space in your home. Rather, any part of your home that is used to operate your business is fair game. See Exhibit A.

So, any part of your home may be used for a home office deduction if it is used for:

• production
• retail sales
• processing
• manufacturing

A word to wise is that you may be able to deduct expenses related to your office, e.g., rent, utilities, repairs, etc. However, these expenses shouldn’t be for purely personal reasons.

For example, you’re running a t-shirt shop out of your garage. If your roof started caving in, you probably won’t be able to claim your roof repair as a home office deduction.

For further information on this topic, see IRS Publication 587 “Business Use of Your Home.”

Tax Return Filing Timelines

Usually, a sole proprietor must file Form 1040 or 1040SR (for people over 65 years old) by April 15.

However, the sole proprietor can choose a fiscal year that is different from the calendar year. If so, the sole proprietor must file a return no later than the 15th  day of the fourth month following the end of the tax year.

The sole proprietor can pay estimated taxes by reporting using Form 1040-ES. This information should be submitted on the following days:

• on April 15
• on June 15,
• September 15
• January 15 of the following year

Sole Proprietorship Accounting

An accounting period for your income tax return is a tax year. A business is allowed to use either a calendar year or a fiscal year.

A calendar year is a 12-month period (January 1^st and ending December 31^st). A fiscal tax year is a 12-month period that starts on the last day of any month except December.

The calendar year is a default for the following:

• The sole owner keeps a set of books and records
• There is no accounting period
• The current tax year of the business doesn’t qualify as a fiscal year
• The sole owner must use the calendar year according to Internal Revenue  Code (IRC)

Cash vs. Accrual Basis

For cash basis accounting, the sole proprietor records income when cash is received or expenses are paid.

Accrual-basis accounting focuses on when expenses or income are earned. So, the sole proprietor would record the income or expense when the invoice is sent or the bill is received.

Basically, you count the money going in and out when the money changes hands (cash basis) or when the receipts are sent or received (accrual basis).

The cash basis is helpful, because the proprietor knows how much money is available at any time. An accrual basis is helpful to show the financials of the business for a period.

Wrapping It Up

Like I said, I’m easy. The sole proprietorship only has a sole owner, making it the simplest form of business ownership.

I also don’t believe in a lot of rules. So, creating a sole proprietorship doesn’t require formal paperwork. The proprietor owns all of the business’s assets, e.g., property.

A sole owner has complete control over the management of the business and gets to keep all of the profits.

But I won’t live forever. In a proprietorship business, the business will stop operating if the owner dies. Also, a sole proprietor may leave the business, which will also end the sole proprietorship.

My debt is your debt. Another downside is that a proprietor is responsible for all of the business debts. So, if the business owner is sued because a contractor did a bad job, the lawsuit could include the business owner’s personal assets, e.g., house.

So, if you plan on picking me, you’ll need something extra. When opening a sole proprietorship business, you should consider getting business insurance.

Will a sole proprietorship be the right fit for your business? Will you need a little more protection?

Find out on the next episode of the business entity dating competition.