If you have a dream of starting your own business, or if you’re ready to launch one tomorrow, choosing a corporate structure is one of the most important decisions you’ll make. You can organize a business several different ways, including creating a corporation, general partnership, limited liability company (LLC), or limited liability partnership (LLP), to name a few.  One of the simplest options is to create a sole proprietorship, which requires no legal formation at all. In fact, in Texas, all you do is begin operating and you automatically own a sole proprietorship.  To determine the best structure for your business, speak to a corporate formation lawyer.

In this blog, we’ll explore the advantages and disadvantages of sole proprietorships. Like any other business structure, there are pros and cons. Let’s take a closer look.

What Are the Advantages of Sole Proprietorships?

  • There is little required paperwork to file with the Texas Secretary of State to start or maintain the business. Therefore, there are also few, if any, filing fees or costs.
  • A sole proprietorship is not required to pay payroll or unemployment taxes if it has no employees. The owner reports the company’s income and expenses as part of their own personal tax returns.
  • The owner of a sole proprietorship has complete control of the business and can transfer assets, stop operations, or sell the business whenever she likes.
  • All profits from the business go directly to the sole proprietor, who does not have to split them among partners or shareholders.

What Are the Disadvantages of Sole Proprietorships?

  • A sole proprietorship is not considered a legal entity separate from the owner. For this reason, there is no distinction between personal and business liability for debts. A creditor, therefore, can go after an owner’s personal assets to fulfill a debt of the business or to recover damages for harm caused by the business or its employees.
  • It can be challenging to find investors, because they would not share in the profits of a sole proprietorship.
  • Sole proprietors must pay all self-employment taxes, which can be significant.  Also, securing health insurance for oneself can mean buying an individual plan rather than participating in a group insurance plan, which can be expensive.
  • Some sole proprietors experience difficulty setting boundaries between their business and personal life. Owning a company by yourself can be all-consuming, and the lack of distinction between business and personal assets can further blur this line.
  • Sole proprietorships work well for some people, while others may want to reduce liability and maintain a better work-life balance. You should carefully examine what type of entity works best for you, and the advice of a skilled business lawyer can help you explore your options.

What Will I Need to Create a Sole Proprietorship?

Following are some of the things you might need to launch your sole proprietorship.

Business Name

Some individuals simply do business as themselves and do not create a company name. This is particularly true of freelancers like photographers, artists, and writers. Other individuals feel that creating a business name gives them more branding options and authority in the marketplace. Either way is fine. If you do choose a business name, you will want to do a search to make sure no one else is already using that name for their business. To find out if your preferred trade name is available, you can run a search on both of the following:

File an Assumed Business Name

If you use a business name that is different than your legal name, Texas requires you to register an assumed business name with the local county clerk’s office in the county where you will be doing business. You do this by filling out an Assumed Name Certificate and paying a nominal fee. This is mandatory in Texas.

Get an Employer Identification Number if You Plan to Have Employees

Sole proprietors who have employees are required by the IRS to have an Employer Identification Number, or EIN, which is a 9-digit number provided by the IRS for tax reporting purposes.  You can apply for one here.  Sole proprietors without employees can use their Social Security number in lieu of an EIN.

Phone Number

Whether you use your personal cell phone number or opt for a separate, dedicated business phone number, you’ll want to make a decision about this before getting business cards printed or creating advertising for your business.

List of Potential Customers/Clients

It’s usually best when creating a business to have a few clients with whom you already enjoy a working relationship, or at least a list of potential clients that you can begin cold calling. This helps your business get off to a quick start.

Dedicated Workspace

Whether it’s a leased office, a separate room in your home, or even a corner nook in the living room, it’s best to have a dedicated workspace for your business.  This enables you to keep all your files and business materials in one place, and it creates a space without distractions.  With a dedicated work space in your house, you can also write off on your taxes a portion of your rent/mortgage, electric bill and other utilities as “Expenses for Business Use of Home” (IRS Form 8829).

Computer, Internet Access, and Appropriate Technology

In today’s marketplace, it’s almost impossible to run a business without the necessary technology. Even if your business is handicrafts, landscaping, or home remodeling, you’ll still need a computer, internet access, and other technology to handle invoicing, recordkeeping, and marketing.

Way to Track Business Mileage

Whether you use a specialized app, an Excel spreadsheet, or a good old-fashioned pen and paper, you’ll want to create a method for tracking your vehicle’s mileage when using it for business purposes.  You can write off business use of your vehicle on your taxes, but keeping good records is essential.

Separate Business Checking Account

While this is not required, opening a separate checking account can help simplifying financial recordkeeping for your sole proprietorship. It can also help at tax-filing time because your business and personal finances will not be commingled.

How Do I Pay Taxes and File Tax Returns on a Sole Proprietorship?

As a sole proprietor, you’ll be required to pay quarterly estimated federal taxes four times a year (IRS Form 1040-ES).  You will then file your business tax returns as part of filing your personal income taxes (IRS Form 1040).  As part of your filing, you’ll include a Schedule C, “Profit or Loss from a Business.”  You’ll also file a Schedule SE for self-employment taxes.

Texas does not have a state income tax, so sole proprietors don’t have to worry about paying quarterly estimated state income taxes.

In the beginning, figuring out your taxes as a sole proprietor may seem complicated, but over time it becomes easier and more routine. An accountant, tax preparer, or business attorney can also help you understand taxation of sole proprietorships.

Discuss the Pros and Cons of Sole Proprietorships with a Skilled Attorney

Selecting an appropriate business entity is only the first of many important decisions that a business owner must make. Many decisions have important legal and financial implications that you should understand and for which you should prepare. The Weisblatt Law Firm works with all types of companies to provide legal guidance, and we work with you to resolve any issues or questions that may arise. Attorney Andrew Weisblatt has decades of legal experience helping both large and small businesses.  To find out more about our Houston business law firm, please email us through our website or call (713) 666-1981.