When starting a business, the most important decision is the type of legal structure you select for your company.
This decision has a significant impact on many aspects of your business. It defines the personal liability you face, how much taxes you pay, the paperwork your business is required to do, and, most importantly, your ability to earn money from your business.
Once you start a business, you have to figure out what legal structure suits you. There are four major types of legal business structures, which include;
- Corporation (S Corp & C Corp)
- LLC (Limited Liability Company)
- Sole proprietorship
However, the simplest structure of these is the sole proprietorship. It is a type of legal structure that usually involves only one person who owns and operates the whole enterprise or company. Therefore, if you want to work alone, and can afford the expenses, then this structure is best for you.
What Is the Tax Paying Mechanism in Sole Proprietorship?
The sole proprietorship has an appealing tax-paying mechanism. In this legal structure, the personal income tax return includes income and business expenses. For this, Schedule C is used to record your profits and losses.
Moreover, in a sole proprietorship, the “bottom-line amount” from Schedule C is transferred to your personal tax return. This feature makes it even more attractive because it prevents the business losses you suffer from, offsetting your income from your other sources.
In short, if you are a sole proprietor, you should also file a Schedule SE with Form 1040. Schedule SE will help you to calculate the amount of self-employment tax you owe. Moreover, while paying annual self-employment taxes, you should make estimations regarding your tax payments if you expect to owe at least $1,000 in federal taxes after deducting your credits.
However, 90 percent of the tax will be shown on your current year tax return and 100 percent of your previous year’s tax liability. (https://www.entrepreneur.com/article/75118)
Not only this, the federal government permits sole proprietors to pay estimated taxes in four equal installments throughout the year on the 15th of January, April, June, and September. In addition, the best part of this legal structure is that tax is only applicable to the business earnings once, unlike other legal business structures. Moreover, being a sole proprietor, you will have complete control over all your business decisions.
What Challenges Can You Expect from Sole Proprietorship?
Although sole proprietorship provides you great freedom, it comes with its price. If you are selecting the sole proprietorship business structure, you are responsible for your company’s liabilities. This way, you place your assets at risk, and the opposite party can seize these assets to satisfy a legal claim filed against you or business debt.
Moreover, sometimes raising money for a sole proprietorship can become difficult. Financing sources and banks are usually reluctant to provide business loans to sole proprietorships. Therefore, in this case, your business depends on you solely for financial requirements because, in this business structure, the founder is the only owner of the company.
However, it is convenient to obtain permits or licenses for this type of business structure. The legal requirements vary in different parts of the world, depending on the state’s laws. Therefore, the entrepreneur needs to make himself aware of all the state’s legal requirements in which he is planning to start the business.
After deciding on the legal structure, you will opt for your business; the next step is a free business name search.
However, you have to make sure that my business name taken because you will not want to further enhance the competition.
Therefore, you have to perform this business name lookup operation keenly.
What Type of Requirements A Sole Proprietor Have in United States?
Suppose you are someone who is thinking of starting a sole proprietorship business in the United States. In that case, you do not have any formalities to start or commence a sole proprietorship business. However, sole proprietors may require permits and licenses depending upon the type of business.
According to the Small Business Administration (SBA), a sole proprietor and their business are the same; therefore, this type of business structure is not subjected to separate taxation and considered the owner’s direct income.
Schedule C list contains income details, expenses, and losses that are transferable to the owner’s tax return. After this, it has nothing to do with the business; only the owner is responsible for paying all self-employment contributions and due income taxes.
Internal Revenue Service (IRS) provides an exception to the sole proprietor (single owner) stipulation, permitting the spouse of a sole proprietor to work for the business. They are neither independent contractors nor partners in the enterprise, and therefore they do not have to pay or submit a partnership income tax return.
Federal Government and private organizations offer many business grants that are available to assist sole proprietors. If you want to qualify for Federal grants, you must comply with determined income standards and business size. Being a sole proprietor, you may apply for a grant in your capacity as an individual for consideration regarding various grant opportunities. State economic development agencies and local governments frequently make grants available for businesses that stimulate the local economy.
What Is A Stock Certificate?
A stock certificate has all the relevant business details, such as the number of shares owned and the stock owner.
You can also get a stock certificate template available on the web regarding different business domains. Moreover, this template also indicates the ownership of stock shares that you can transfer to another stockholder easily.
What Are Corporate Bylaws?
Corporate bylaws consist of a detailed set of rules. It includes all the legal documents that a company or corporation would need to be in place. These are the documents that while designing its execution procedures and internal management structure.
What Is an Operating Agreement?
It is a key document that outlines the functional financial and decisions, including rules, provisions, and business regulations.