Importance of Picking Business Structures

America has long been a country of small businesses and corporations working to create a competitive environment that works best for the consumer. Many business owner’s operate as sole-proprietors, but is this the most effective or protective for them? We’ll examine the benefits and risks of separate business entities in a multipart series.

Sole-proprietorships are the most common business entity in the United States. Part of the reason for the commonality of the sole-proprietorship is the ease of setting one up. For many, it is simply as easy as obtaining a business permit from your local government. As the sole-proprietor, you are entitled to all of the profits, losses, and liabilities.

Due to the pass-through nature of the income for sole-proprietorships, the owners are entitled to the newly created IRC 199A. Section 199A will allow for up to a 20% deduction on qualified business income. This deduction was designed to help sole-proprietors and other smaller businesses have greater income and help the businesses grow.

The downside to the sole-proprietorship is the liabilities. Unlike corporations or LLCs, sole-proprietorships have unlimited liabilities from the company to the owner. This means if facing a lawsuit the claim can collect from the owner and business (because there is no disconnect between the two).

Considering the upsides and downsides of the sole-proprietorship is important, especially when considering the liability aspect. Perhaps considering a more complicated entity will help provide better protection. If you have questions about your business structure, contact the professionals at the Center for Financial, Legal & Tax Planning, Inc.