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Word Up Wednesdays – Sole Proprietorship v. Corporation

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Rock On!  You are a small business owner!  Now let me ask you a question – what type of business do you have?

I don’t mean – what does your business do, or what product do you sell or what service do you  offer.

I am asking –

Are you a Sole Proprietor or a Corporation? 

There are some very distinct differences between how your business is filed with the US Treasury and the Secretary of State.  The biggest differences are those between a Sole Proprietorship and a Corporation.

The important thing to remember  – A Corporation is a separate entity.  This means it files taxes separately, has shareholders and will protect your personal assets in most cases.

It is my philosophy that any business regardless of size or age can be a corporation.  But whether or not your business should become a corporation should be decided based on recommendations from your CPA and your attorney.

Here are a couple of things to consider:

Corporations:

  • Shareholders are not responsible for corporate debt.
  • Corporations can offer self-employment tax savings.
  • Corporations offer protection of personal assets.
  • There is more of a cost associated with setting up a Corp and you will be required to do certain things annually such as conduct a Shareholder’s meeting.

Sole-Proprietor (SP)

  • SP’s offer easier start-up abilities and simple tax filing.
  • An SP is a bit easier to operate and make changes instead of dealing with shareholders.

What sort of businesses should be incorporated?   Like I said above, this should be based on the recommendations of your CPA and attorney.  But here are a couple of examples to consider:

  • If you own a small hair salon I would highly recommend becoming incorporated.  Imagine if someone tripped and fell in your parking lot of your building.   Someone could easily sue for medical expenses, lost wages, etc.  If you are not incorporated – they can draw money from your personal assets – meaning your home, savings and retirement funds.  By setting up the business as a corporation – they will only be able to go after the business assets.
  • Maybe you offer house cleaning services in your client homes.  What if you accidentally clean a stain in the carpet with a cleaner that ruins not only the carpet but also the sub-flooring.  Most likely your insurance will cover this damage, but if you aren’t insured or are under-insured, the client could come after your personal assets to pay for the damages if you are not incorporated.
  • Assuming you are paying yourself a salary (which you should be as a small business owner) one way to help save costs is by being incorporated.  Your CPA can tell you which sort of Corporation would be best for your situation.

It is very easy to just put off the decision of whether or not to become incorporated, maybe because you don’t really understand this whole thing.  Or maybe because you believe you will always be diligent and not have any accidents.

The latter line of thinking – while optimistic, is very dangerous.  Accidents happen and sometimes they happen despite our best intentions.

If you are unsure or you really don’t understand the whole Corporation -v- Sole Proprietor – – a call into your CPA or attorney will help answer this question.  Fifteen minutes on the phone with either of them can save you tons of time and money in the long run.

I’m available to bounce ideas around if you are uncertain of what sort of business entity you should be.  I can offer examples of potential situations which might make your decision easier to make.  Shoot me an email and let’s talk about it (there is no charge for this service).  amy@amymunns.com

Happy Wednesday ~ amy

PS  – I realize that this is a day late – but I didn’t want to skip this week’s edition to Word Up Wednesday. Thanks

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Author: amymunns

Finding more minutes in your day. Specializing in time management, goal setting, prioritizing tasks for small business, busy professionals and active families.

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