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Sole
Proprietorships
Pros
and Cons
From
the Guam Business Resource Guide:
A
sole proprietorship or simple partnership is a
business of one or more owners without corporation or
limited liability status. The individual(s) represent
the company legally and fully. Common proprietorships
and simple partnerships include part-time businesses,
direct sellers, start-ups, contractors, and
consultants.
This
form of business has several advantages:
Quicker
Tax Preparation: As a sole proprietor, filing
your taxes is generally easier than a corporation.
Simply file an individual income tax return (IRS
Form 1040) including your business losses and
profits. Your individual and business income are
considered the same and self-employed tax
implications will apply.
Lower
Start-up Costs: Limited capital is a
reality for many startups and small businesses. The
costs of setting up and operating a corporation
involve higher set-up fees and special forms. It's
also not uncommon for a lawyer to be involved in
forming a corporation.
Ease
of Money Handling: Handling money for the business
is easier than other legal business structures. No
payroll set-up is required. To make it even easier,
set up a separate bank account to keep your business
funds separate and avoid commingling personal and
business activities.
There
are some disadvantages to a sole
proprietorship/partnership that include:
Personal
Liability: Your small business in the form of a sole
proprietorship is personally liable for all debts
and actions of the business. All your personal
wealth and assets are linked to the business.
Lack
of Financial Controls: The looser structure of a
proprietorship won't require financial statements
and maintaining company minutes as a corporation.
The lack of accounting controls can result in the
demise of your small business. No matter the legal
structure of your business, take time to set up the
proper financial statements for your company.
We
rarely recommend a sole proprietor ship, except
for business, with small capital investment, no
employees and little risk of large debt.
Selecting
the sole proprietorship business structure means you're
personally liable for your company's liabilities. As a
result, you're placing your own assets at risk, and they
could be seized to satisfy a business debt or legal
claim filed against you. Since Guam is a community
property state, it is possible that your spouses assets
could be at risk also.
Raising money for
a sole proprietorship can also be difficult. Banks and
other financing sources are reluctant to make business
loans to sole proprietorships. In most cases, you'll
have to depend on your own financing sources, such as
savings, home equity or family loans.
Taxes can
be easy to prepare as profits and losses are first
recorded on a tax form called Schedule C, which is filed
along with your 1040. Then the "bottom-line
amount" from Schedule C is transferred to your
personal tax return. As a sole proprietor, you must also
file a Schedule SE with Form 1040. You use Schedule SE
to calculate how much self-employment tax you owe. Self
employment tax is the owners contribution to his/her
Social Security Account.
In
addition to paying annual self-employment taxes, you
must also make quarterly estimated tax payments on your
income. Currently, self-employed individuals with net
earnings of $400 or more must make estimated tax
payments to cover their tax liability. If your prior
year's adjusted gross income is less than $150,000, your
estimated tax payments must be at least 90 percent of
your current year's tax liability or 100 percent of the
prior year's liability, whichever is less. The federal
government permits you to pay estimated taxes in four
equal amounts throughout the year on the 15th of April,
June, September and January. With a sole proprietorship,
your business earnings are taxed only once, unlike other
business structures.
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