When Should You File a Sole Proprietorship?

When Should You File a Sole Proprietorship?

November 8, 2020

A sole proprietorship is the simplest business structure. It involves relatively little paperwork or legal filings when you first get started and doesn’t require a whole lot of upkeep with regard to paperwork on an ongoing basis.

However, it is important to understand the risks that come with filing as a sole proprietorship, chief among them being that your business will not be distinguishable from you in any legal manner. This means your own personal assets are at risk if you face liability issues stemming from business activities.

Understanding this risk, then, when is it a good idea to establish and file as a sole proprietorship in Union City, NJ?

When sole proprietorships are beneficial

A sole proprietor is a single person running an unincorporated business. When incorporated, a business becomes its own separate legal entity, capable of owning assets and holding debts in a way that shields the owner from personal liability. But as a sole proprietor, you are the business, meaning if you lose a lawsuit or your business is subjected to any types of fines or judgments, your personal assets could be at risk. Generally, if you have some substantial personal assets, it is a good idea to incorporate instead of starting a sole proprietorship.

However, there are some cases in which sole proprietorship is a preferential option. Its simplicity makes it very attractive to brand-new entrepreneurs who do not expect long-term growth of the business beyond just themselves.

There are no legal filings you need to worry about to officially start the business. You’ll need to report business income on your personal income taxes and follow all the rules for making quarterly estimated tax payments, but that’s basically all the paperwork responsibility you have as the owner of a sole proprietorship.

This is also a good option if you have fully self-financed your business from your own savings, without any business loans or other capital. Some people may take out personal loans or credit cards to get some initial funds, but this can be very risky when you’re dealing with high interest rates. But, if you will have a very low overhead, self-financing is a realistic option for sole proprietorships, and its simplicity makes it highly beneficial.

Establishing a sole proprietorship

You will need to check with local business offices if you wish to operate under a fictitious business name, and your line of work may also require some local licensing. It is common for cities to require all small businesses to be registered officially, even if they are sole proprietorships.

If you are unsure about who to connect with, you can reach out to the Small Business Administration, and their representatives will be able to point you toward the right government entities.

If you’re interested in learning more about starting a sole proprietorship and what you should know about filing your taxes as a sole proprietorship, contact the tax professionals at Kedean’s Generation. Our accountants in Union City, NJ, will be happy to assist you!

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