In today's Freedom Friday blog and email newsletter, I'm going to talk about a topic that I've discussed before, and that comes up more often than you would think. I have many clients who either operate as a DBA, but really are a sole proprietorship, or who are considering going into business with nothing more than a trade name (a DBA). I am often asked, “Why can't I do that?” As I tell many of my clients, “You can do anything you want; the question is should you do that?” So, in today's Freedom Friday blog and email newsletter, I'm answering the question, “Is a sole proprietorship right for me?”
There is no legal difference between a sole proprietorship and the person who owns it. This means that the small business owner who operates as a sole proprietorship has absolutely no liability protection. This is because the owner of a sole proprietorship is the boss and is the business himself or herself. Unless you are registering a trade name (also called a DBA which stands for “doing business as”), you do not need to fill out any paperwork with the State of Oklahoma to register as a sole proprietorship. You may need to fill out the paperwork for a sales tax permit, or fill out paperwork for licensing requirements, but your business itself does not have to register with the Oklahoma Secretary of State.
In addition, all the assets, liabilities, revenues, profits, and losses all belong to you as the owner of the sole proprietorship. This means you are personally responsible, or liable, for everything in your small business, good or bad. You can be held personally liable for the debts of the business, and this means creditors can seize your personal assets, like your home, which might not have anything to do with your business.
For tax purposes, a sole proprietorship is considered a “disregarded entity,” which is also true of an LLC by default (an LLC can also choose to be treated as an S-corporation, but that's a different story). So, income of the sole proprietorship will pass through to Schedule C of your individual federal tax return. However, you will also be required to pay self-employment taxes to the IRS as a sole proprietor, and this is done through a tax on net earnings on your self-employment.
So, is a sole proprietorship right for you? Maybe. As I've shared previously in the Freedom Friday blog and email newsletter, a sole proprietorship provides no asset protection or liability protection; it can be dangerous for the small business owner who chooses to be a sole proprietor. Honestly, a smart small business knows how to mitigate the risks of starting a small business, and for most small business owners, some risks can be properly mitigated by forming an LLC instead of choosing to be a sole proprietorship.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
For more information about Liberty Legal Solutions, LLC, please visit our website at http://www.libertylegalok.com/