| Small business owners and entrepreneurs regularly | | | | deduction amount. |
| agonize over the incorporation question--and about | | | | Note: The standard deduction amount equals $5450 in |
| related topics such as when a limited liability company | | | | 2008. In the years after 2008, the standard deduction |
| makes sense and whendoes an S corporation really | | | | increases because of inflation. |
| save an owner taxes. | | | | The ability to employ minor children, take the tax |
| This obsessing over more sophisticated (and | | | | deduction on your tax return, and then let the kids |
| expensive!) entity options is too bad, however. New | | | | avoid income and payroll taxes could save your family |
| small business owners can count at least five great | | | | almost $3,000 in taxes per year per kid working in the |
| reasons to start a small business as a sole | | | | family business. Wow. |
| proprietorship. | | | | A final caution: The kids need to be doing real work |
| Reason 1: Simple Setup | | | | and be paid a reasonable wage. |
| As compared to incorporating or forming a limited | | | | Reason 4: Easy Deductibility of Health Insurance |
| liability company, sole proprietorships are a breeze. All | | | | Sole proprietors can more easily take a deduction for |
| you really need to do is start. That's it. | | | | family health insurance. The rules are a wee bit tricky. |
| Note: State and local governments usually want you to | | | | The family can't be receiving subsidized health |
| get a business license so they can begin taxing your | | | | insurance from, say, a previous or current employer. |
| new business. But getting a business license in many | | | | And you get the medical insurance deduction only to |
| cases is pretty easy. Check the phone book or call | | | | the extent your business makes money. |
| your local state or municipal government offices. | | | | Nonetheless, sole proprietors will often be able to |
| Reason 2: Easier Accounting | | | | deduct their health insurance. (Employees normally |
| If you run your business as a sole proprietorship, you | | | | don't get to deduct health insurance premiums.) And |
| keep your accounting truly easy. If you're the only | | | | sole proprietors can much more easily take the |
| worker, you won't even have to do payroll. Not having | | | | self-employee deduction than corporation |
| to do payroll saves tons of time, lots of money, and | | | | shareholder-employees and partners in partnerships. |
| means you avoid doing between five and ten payroll | | | | Note: Technically, the self-employed health insurance |
| tax returns a year: quarterly federal and state returns, | | | | deduction is available to S corporation |
| the annual federal unemployment tax return, W-2s, and | | | | shareholder-employees and partners in partnerships, |
| so forth. | | | | but the rules for taking the deduction are more |
| What's more, you won't have to prepare balance | | | | complicated and tend to change from year to year. |
| sheets as part of your business tax return. Your sole | | | | Ugh. |
| proprietorship's income and deductions will typically be | | | | Reason 5: Future Flexibility |
| reported inside your individual tax return on a single | | | | One final reason exists for considering the |
| page of paper. | | | | under-appreciated sole proprietorship option. With a |
| In comparison, corporations and partnerships often do | | | | sole proprietorship, you can easily switch to some |
| have to prepare balance sheets for their tax returns | | | | other form at a later date--and almost always with |
| and a boatload of other supporting schedules. | | | | zero negative tax consequences. |
| Commonly a corporate tax return runs between ten | | | | With a sole proprietorship, for example, you can decide |
| and twenty pages in length. Yikes. | | | | in year two or three that you want to incorporate your |
| Reason 3: Minor Children as Tax Shelters | | | | business or reform as a limited liability company. No |
| If you employ your minor children in your business, a | | | | problem. What's more, at that point, you can think |
| sole proprietorship offers up one of the sweetest | | | | about whether making an S corporation election |
| small business shelters there is. Amounts you pay your | | | | makes good sense. |
| minor children count as a tax deduction for your | | | | A sole proprietorship keeps things simple now but also |
| business--which saves you income taxes and | | | | keeps open your future options. |
| self-employment taxes. But the amounts your minor | | | | In comparison--and this is especially true with |
| children earn probably aren't taxable to them for either | | | | corporations and somewhat true with limited liability |
| income tax or Social Security and Medicare taxes | | | | companies--reforming other business entities takes |
| purposes if they make less than the standard | | | | time and can cost lots of money (including taxes). |