Last week, I introduced a series that will look at the different options you have in terms of organizing your home business. I mentioned that we would be guided by the Problogger article on the subject, which was guest written by Taxgirl. Today we will look at the sole proprietorship.

Sole proprietorship

This is a very simple arrangement. You don’t have to file any paperwork or set up any sort of business entity. Your business income is reported on Schedule C of the 1040, and you treat is as part of your income. Business and personal are fairly interchangeable in this instance. But, as is pointed out on Problogger, there are some downsides:

The downside of these “loose” requirements is that sole proprietors are
personally liable for debts, obligations and the like of the business,
including lawsuits. Personal assets are essentially treated, for
liability purposes, as assets of the business.

Another downside is that your taxes are likely to be higher. Last year, I switched to a Limited Liability Company from a sole proprietorship. Instead of paying $15,000 in taxes, I only paid about $6,500. That’s a big difference. Once your home business starts doing well enough that it boosts your taxes, you might consider switching from a sole proprietorship.

A knowledgeable tax attorney or accountant can look at your home business and income situation and help you figure out what would be most beneficial for your situation.