There are many types of business structures you can choose, being a sole proprietor is the most common. My cleaning company is a sole proprietorship.
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The biggest advantage of a sole proprietor filing is that it is very easy and cheap to file. You do not need to do any State level filings. All I did to start my cleaning company was choose a name, use my personal SSN, and fill out a one page form with my local city to operate and pay a nominal filing fee.
The next best advantage is that you will not need to file an extra tax return. Every other structure (except Single Member or Husband-Wife LLC) require an additional tax return. A sole proprietor will just file a Schedule C on their personal 1040.
The income from a sole proprietorship is taxed at the individual’s effective tax rate. If the business loses money, the loss can offset other forms of income (ie. wages, retirement distributions.) Note that you will have to pay self-employment taxes (15.3%) of the earnings, which is the employee and employer portion of FICA. Currently there is a deduction for the employer portion.
Other advantages:
- Converting to another business structure is not a taxable event.
- The owner makes all of the management and operational decisions. There is no rigid structure or requirement to have officers and conduct shareholder meetings.
To me, the biggest disadvantage of a sole proprietorship is the owner faces unlimited legal liability. Many of the other structures are protected under a “corporate veil.” Under the limited liability type structures, only the corporate assets are at-risk. For my cleaning company, I do not have any employees and carry a $10,000 bond to limit my liability.
Much more is at risk with my CPA firm, so I have that structured as a Professional Corporation.
If you take out a loan, the proprietor is also responsible to pay, even if the business fails. Unless the business owner of a limited liability structure personally guarantees the loan, they would not be responsible for repayment.
Other disadvantages:
- Self-employment taxes.
- If the owner dies, the business technically terminates. All that is left is business assets and liabilities.
- Selling an ongoing sole proprietorship is selling assets.
While the easiest and cheapest way to get into business is starting a sole proprietorship, weigh your risk of legal liabilities before going with this structure. I personally would be wary if you had any employees, had business property or made financial recommendations to others.
If you need help filing your 1040 and Schedule C, send me an email at contact@sidehustleretirement.com. I am a licensed Georgia CPA, but prepare business returns from numerous states and 1040NRs for residents of other countries with US revenue.
