When to Use a Sole Proprietorship | Mark J Kohler | Tax & Legal Tip

Hi, Mark Kohler here with a two minute tax and legal tip. Let's talk about when to Use a Sole Proprietorship now this is a big topic and usually requires a discussion about LLCs and S Corps and when is the right time to make a transition again? I've got lots of videos and very in depth videos on my website where you can learn more about this. Let's talk about the basics here and there's three tips I want to make. Number one, I think starting out with a sole proprietorship is awesome. It's a great way to get your business started and to just start tracking expenses. Test out your idea, test out your business plan, make some sales online, make some sales in person. Don't feel like you have to rush out and set up an LLC or a corporation of any sort just to get started. The sole proprietorship is built on simplicity and just being able to get your business up and going so you so don't get scared or sold into an entity before its time. Number two, the time to start transitioning from an S Corp can depend on two things, asset protection or taxes. Let's talk about asset protection for a moment. Essentially you can start out with that sole proprietorship, track your expenses and income and get things going. But what happens if there's some liability exposure? Are you selling a product or a service? That lemonade stand and people are walking up and buying lemonade and could slip on a lemon peel. Maybe you have a small restaurant or something that's creating some exposure. If so, going to a single member LLC and converting from a sole proprietorship to a single member LLC doesn't save you any taxes and you'll still report it as a Schedule c on your 1040. But you get the asset protection of an LLC. It's simple, it's cheap and easier than incorporating when the tax reason may require us to get a little more organized or a little more aggressive on our planning. Number three, that brings up the S corporation and when tax planning should initiate the change from a sole proprietorship into something more elaborate, the sole proprietorship has a major problem. You're going to pay self employment tax. Also, we have the concern of liability, right? So again, the sole proprietorship is a great place to start when you're just getting things going and testing out your product or service. But if you're starting to make more than 20, 30 or even $40,000 a year, the self employment tax can just blindside you and cost you a lot thousands of dollars. That's what I'd like you to convert to an S corporation. Now you may have an LLC already and you can convert the LLC to an S Corp or make an S election, but the S Corp allows you to be creative with your salary and dividend or pass through income and save on self employment tax. Got lots of other videos on that and a big topic. But the point is again, the sole proprietorship is a great place to start and then you can always convert to an LLC or an S Corp later. Bottom line, for years and years living the American Dream couldn't be simpler with a sole proprietorship, but you just have to be careful as you grow and expand. Keep studying, keep living the American Dream and I'll see you on the backside. Thanks for listening and I hope that information was helpful and let me speak from the heart here. I've been talking about topics like this for 1015 years. I'm a CPA attorney, best selling author, radio show host and I am passionate about helping small business owners save taxes, build wealth and protect it. Please check out the link right here. Download my free ebook on 10 Common Mistakes Small business owners make in the tax and legal arena. Also check out my social media links here. I've got Daily Tips, a weekly blog radio show every week. This information is free and I'd love to help you. Click below. Find out more about me and thanks for listening.