After working long hours as an employee, you are now ready to start your own business. How do you start a business? This is a fascinating question that we must investigate more deeply. The primary request of business (a play on the words suggested) is to decide what type of legal structure we should use in order to protect ourselves.
The new company has many options when it comes to choosing the authoritative document that it should use. A current business might feel that changing forms is attractive.
Any business form has its plus and minus points. The reader should have a basic understanding of the options when looking at different types of organizations. This discussion does not include detailed discussions of tax and business aspects of each business. Only the “widely inclusive ideas” of each topic will be discussed.
Sole Proprietors
Solo proprietorships are the most simple business form, as they do not have separate tax or legal elements. However, they can be expansions of the individual taxpayer who claims them. The proprietor is the only person who can be associated with the business. The business’s liabilities are the personal liabilities of the proprietor.
Each advantage of a sole proprietorship is treated separately for tax purposes and not as a feature in one general ownership interest. A sole proprietor who offers a business as a going concern can gain or lose independently on each asset.
The sole proprietorship does not require a special return. All transactions reported by the proprietor are included in the individual’s tax return (i.e. Schedule C, Form 1040).
Sole proprietors are considered independent contractors. A sole proprietor is not subject to tax if a taxpayer withdraws cash from the business or exchanges cash with the business.
Advantages
A sole proprietorship has many advantages:
(1) Low organizational costs are a must
(2) Administrative, legal, and accounting fees are lower
(3) Federal and state income taxes could be lower than the federal;
(4) Administration is simpler.
Advantages
A sole proprietorship has its disadvantages:
(1) Personal liability
(2) Inability to split income
(3) There are limited fringe benefits.
(4) Self-employment tax.
Self-employment Tax
If a taxpayer is a sole proprietor, they must pay self-employment tax (SS1401). The non-worker portion of the Social Security tax system is the self-employed tax. Independent work tax took 15.3% of the pay in 2017, which is 12.4% for social security [OASDI] compared to 2.9% for Medicare (HI]). This figure was derived from self-employment. Self-employment tax is not affected by deductions such as home loan interest, land taxes, and state wage tax. However, self-employed income can be diminished by business deductions.