Why You Shouldn’t Do Business As A Sole Proprietorship

Don’t Let The Easy Admin Aspects of A Sole Proprietorship Lure You Into This Structure

Are you operating as a Sole Proprietorship (SP)? Chances are you went this route because it is the least expensive entity to form and structure.

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Not surprisingly, 73% of small businesses in the US are SPs. Some benefits of an SP are that the business owner is in complete control and entitled to all profits, there is easy tax prep, there are lots of deductions, and legal formation costs are at the bare minimum—often only for necessary licenses and permits. You don’t even need to register with the state. With so little administration required, a sole proprietorship is the simplest business to set up or take apart, making it popular among individual self-contractors, consultants, and small business owners.

However, there are many ramifications to consider beyond startup costs. The owner is responsible for all the business's debts and losses and is exposed to unlimited personal liability. Yikes! That and these other troublesome bits; some businesses, agencies, and consulting groups won’t ever deal with a SP, it is harder to raise capital, and an SP can be challenging to sell.

Anderson does not advocate for organizing as an SP because it confuses the IRS. They don't know if you're an individual or a business. You're something in between, right?

And they need to get some sort of proof that you're a business. That's where the IRS digs in their claws, and you lose a lot of tax benefits. Sole proprietors lose their audits 94 to 95 of the time, depending on whether it's a field audit or a correspondence audit. You absolutely do not want to be the type of entity structure that the IRS perceives they're going to win against whenever they do an audit. So, when you file as an SP, they lick their chops because they know that they win those audits 95 of the time.

Flip it around. If you are an S corp where you barely ever get audited. What do you do?? They win quite a bit, but the IRS probably is not going to attack you nearly as often.

To learn more about the attractive alternatives to operating as a Sole Proprietorship, why not schedule a complimentary 45-minute Strategy Session with a seasoned Anderson Advisor? You’ll get sage insights about options for operating your business and a free blueprint to chart your path to greater success.