The Pros and Cons
| The Pros | • No formal creation process. • Easy to operate and dissolve. • No separate tax return. • Easy to integrate business use of home deductions. • No double taxation of profits. |
| The Cons | • No liability protection, except through insurance. • Self-employment tax is assessed on entire profit of the business. • Transfer of ownership can be complex. • Limited access to fringe benefits for owners. |
| Is a Good Fit For | • Seasonal or part-time business. • Businesses with little liability risk. • Home-based businesses. • Businesses intended to operate for the owner's life only. |
Conclusions
While running even a sole proprietorship is not exactly as easy as buying a paint brush and finding a house to paint, do not let the paperwork requirements overwhelm you. To make sure that you have a good understanding of the requirements, I would advice talking to a professional tax advisor in your country and make sure you have a good understanding of your responsibilities. Make sure you consult a reputable firm like H&R Block and ask for a tax advisor that specializes in business returns. Initial consults are normally for no cost at a good firm.
If you are a person that just hates paperwork, there are many firms that will take care of all of your payroll needs, such as issuing payroll checks, deducting the appropriate amounts, filing all the government paperwork and remitting the taxes owned. Shop around, compare prices and get referrals. Often, the cheaper price will end up costing you more in mistakes in the long run. For instance, in the USA, if you have not remitted at least 90% of what you owe by the end of the remitting period, there is an additional penalty to pay.
What so many new business people do not consider is that they need to be putting away at least 30% to 40% of their net profits just to cover tax liabilities. (Many countries are even more.) And having to come up with the money to pay a large tax bill at the end of the year has doomed many businesses to failure. So, remember that having a clear understanding of the relationship between you, your business and your government rules and obligations will allow you to make better decisions as your business grows.