Last Friday, I intimated that this week we’d look at the three main ways to set up a home business. Well, it is next week, and today we will be looking at the advantages and disadvantages of the sole proprietorship.

A sole proprietorship is a common set-up for a home business. Why? Because it is simple and requires very little legal finagling to put together. Formal business requirements aren’t even necessary in many cases, and transfer of business (including sale) can be made at your discretion. In fact, since you are a sole proprietor, you make all of the decisions.

Up until last week, I was a sole proprietorship. It was very easy. On my Schedule C (which is what you use to report your home business income in the sole proprietorship case), all I had to do was use my Social Security Number. It is not necessary to get a tax ID number for a business. And you don’t pay corporate taxes.

But there is a major disadvantage: You pay your own self-employment tax. This can get expensive. I found out last year that as I began doing better, my taxes went up substantially. Now, paying taxes is important. But it is hard to pay taxes that are that large when you have a home business. Just think: you have to pay around 15% in self-employment tax. That can be pretty difficult in some cases.

If you start making a substantial amount, I would consider switching your home business away from a sole proprietorship. And if you keep it as such, consider contacting the IRS and setting up for quarterly self-employment tax payments. It will make it easier to swallow than paying all at once.