Types of Businesses: Sole Proprietorships

Starting your own business often starts with an idea, sometimes an idea that nags at you until you act on it. It is easy to simply jump right in, but this can ultimately be very risky, as there are a number of practical considerations that must be considered when starting a business. One of the most important considerations is what type of business to start and there are actually several options.

Sole Proprietorships

When you start a business and have no partners, it is generally considered a sole proprietorship. In terms of taxes and how you will be assessed by the IRS, a sole proprietorship is classified as a unincorporated business that is owned in its entirety by a single person.

Depending on where you live, this could require that you register your business with the city or town, which is often as simple as filling out a form with the name of your business.

It is important to note that in terms of liability, when you run a sole proprietorship, your business and personal assets are at risk if you incur a debt. Some states will offer protection of certain assets, such as ones home or Retirement accounts, but this is not always the case.

The Independent Contractor

The Independent Contractor is one of the most common types of sole proprietorships, which is simply someone that offers their services to a company or person, without being an actual employee. This can have benefits both for the contractor, who can often claim more on their taxes as business expenses, as well as the employer, who is not responsible for things like employment taxes or providing health care.

As a result of the tax benefits associated with being an independent contractor, it is common for the IRS to attempt to redefine an independent contractor as an employee, so if there is any question as to whether the person is actually an employee or a contractor, from a legal standpoint, it may be better to go the safe route and declare yourself as an employee.

One Member Limited Liability Companies

To help reduce the risk of being a sole proprietor, one option is to create a limited liability company(LLC,) which will mean that only business assets will be at risk and most personal assets will be protected in the event of a lawsuit. A One Member LLC is classified by the IRS as a disregarded entity, but it is usually possible to be taxed as a corporation, although from a monetary standpoint, this may not be the best choice.

Tax Deductions as a Sole Proprietorship

Generally, the income after deductions is the amount claimed in the income section of a 1040 for a sole proprietorship., although depending on the type of business, there are a few other options available. When using a 1040, the deductions and income are stated under Schedule C of the form which covers Profits and Loss from a business.

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