When you are starting a new business, it is important to determine the structure that makes the most sense for the needs of your company. Although many entrepreneurs start as a sole proprietorship it is a good idea to understand the advantages and disadvantages of doing so. Before you make a decision, you should obtain the help of a qualified CPA.
When a company is set up as a sole proprietorship, it involves just the business owner, without creating a separate entity. Even though a separate company is not established, it is still important for the business owner to maintain separate financial records for their personal spending and the business spending. Different files allow you to understand the business liabilities and assets on their own, without the inclusion of personal liabilities and assets.
With a sole proprietorship, all of your personal assets are subject to the business liabilities, and the business assets are subject to your personal liabilities. So, it doesn't offer you much personal protection if the company incurs a lot of liabilities. The main disadvantage is the personal liability that you are forced to carry with this type of business.
The advantage to choosing a sole proprietorship is that the startup costs are usually lower because you can save the filing fees that are required to start an LLC. These savings could be anywhere from $50 to several hundred dollars, depending on the state where you reside. Also, it may help by keeping the accounting easy, because there aren't specific accounting requirements. Of course, you need to keep accurate tax records to correctly file your tax paperwork each year.
If you choose a sole proprietorship, your CPA will advise you to keep the business affairs separate from your personal spending. Although it isn’t a requirement because technically there isn’t a legal distinction between the business and the individual, it is certainly a best practice.
Charles P Myrick CPA, Washington DC tax preparation firm, specializes in accounting and bookkeeping services for new business start ups and entrepreneurs. If you are a new entrepreneur, give us a call. We invite you to learn more about the small business accounting services that are available: (202) 789-8898.