Since no formal filing needs to be completed to operate a sole proprietorship, it often is the default business structure for many new businesses. There are a few reasons why we see so many sole proprietorships. Sometimes, a sole proprietor has no intention of starting a business but just starts selling a product or service. Some people don’t want to go through the hassle or financial burden of incorporating. Other times they don’t think their business is risky enough to need that extra layer of protection. It is important to know when to consider registering a legal entity to obtain the advantages of limited liability and otherwise. Consider these instances where registering a legal entity might be a good fit:
Reduce Your Personal Liability
As previously explained in our recent blog, Which Business Structure Best Suits Your Business, sole proprietorships offer zero division between your business and personal assets, increasing your personal liability at risk. As a business grows, so can your personal risk. If you notice your business is growing quicker than expected it may be smart to consider converting to an LLC or corporation, where personal liability is limited.
Seeking Tax Flexibility
Paying taxes is inevitable but choosing the right structure can alleviate some of your personal financial burdens. As a sole proprietor, you must file self-employed or personal tax forms. You are responsible for paying taxes on all profits and revenue earned from the business and filing it as personal revenue. Converting to a corporation or LLC will allow you to only pay taxes on the profits you make from the business, and provide additional flexibility. We recommend converting at the beginning of the year to avoid filing two different tax forms for the business. Always seek the guidance of your CPA or tax professional when making tax decisions.
If you intend to have a business that seeks investors, funding, or any sort of capital, having a sole proprietorship will often make raising capital more difficult. Banks have more comfort and confidence in providing more established business structures with loans and investors typically seek some sort of ownership piece or partnership structure in return for their investment when deciding to fund a business. Considering an LLC or a corporation in this scenario will facilitate more financing options and provide the business owner with additional flexibility in raising capital.
Before making these types of business decisions, call us today to schedule a consultation so we can help you determine which business structure is right for you.