Business Entities - Sole Proprietorship

In the state of California, the following are the business entities that are allowed:

1. Sole Proprietorship
2. Limited Liability Partnership
3. General Partnership
4. Limited Partnership
5. Limited Liability Company
6. Corporations (C-Corporations and S-Corporations)

In the next few blogs, I will be going over the filing requirements for each of these entities, how the entities are created and what forms are required for the entities to file their taxes.  I will also go over the major advantages and disadvantages of each one.  Keep in mind that I am not an attorney, so all I am giving is my opinion.  If you want a legal opinion, please consult an attorney.  I do not dispense legal advice.

Sole Proprietorship
Sole Proprietorship is basically going into business for yourself as yourself.  This is the government allowing you as a person to own and operate your own business.  You will have total control and make all decisions on your business.  You receive all profits from the business and you are responsible for all taxes and liabilities of the business.

If you call the business something other than the person who owns it name, you need to file a form called a Fictitious Business Name Statement with the county where the principal place of business is located.  Example:  You are Joe Smith.  You want to open a Card Shop.  You want to call it Joe's Card Shop.  You will need to file a Fictitious Business Name Statement, because it does not have your full name as part of the business.  No formation documents are filed with the California Secretary of State's Office.  You can request a tax identification number from the IRS to identify your new business.  I suggest this so that you do not need to give everyone your social security number when they ask for the business' tax identification number.

Taxwise, it is easy for you to file the taxes.  You file it along with your own personal taxes on your 1040 (and 540 for the state of California).  To capture the business information, you will file a separate schedule C for each separate business you operate as a sole proprietorship.  The total of all of the schedule Cs will be entered on line 12 as income (or loss if negative).

Advantages of this type of business is you own this entity, and no one can take it away from you.  You also make all the decisions.  This means who to do business with, how to advertise, who you want to employ (if any one) and so on.  All decisions are yours.  You also get all of the profit.

Disadvantages of this type of business is that you bear all of the liability.  For instance if you sign a year long lease and the business fails on month 2, you will still owe 10 more months of a lease you will have no use for the building.  If someone sues the business, they are suing you.  All expenses are your responsibility.  No getting out of it.  You also will need to pay Self employment tax.  This could mean putting some of your income aside and paying it to the government once a quarter.