At some point during their careers, most people consider going into business on their own. Whether they want to escape an evil boss, have the freedom to run things their own way, or take full advantage of an idea they have, laws in the United States make it relatively easy to try to reach this dream.
In fact, the only thing you really have to do to start a business of your own is to make yourself available to work, and start working.
On the other hand, you should consider several decisions before you get started. There are many different ways to establish a business, and the method you choose can make a big difference not only in how your business will work, but also in what kind of impact your business will have on your entire financial situation.
The types of business entities that you can establish include sole proprietorships, partnerships, corporations, and limited liability companies.
According to statistics released by the Small Business Administration (PDF file), sole proprietorships -- businesses run and managed by the owner directly, without any separate business entity -- represent 73% of all businesses in the United States. Sole proprietorships are very simple to set up. In many cases, people who go into business for themselves without any additional formalities end up as sole proprietorships without realizing it.
While the main advantage of forming a sole proprietorship is simplicity, its primary disadvantage is its inability to protect its owner from business liabilities. If someone makes a claim against the business, and its assets are insufficient to pay the claim, then the person making the claim can collect from the owner's personal assets. Although business liability insurance is available in many industries to provide additional protection against claims, the sole proprietorship's lack of additional business protection makes it unattractive to certain types of businesses where liability is a major concern, such as medical and legal practices.
Sole proprietorships are not treated as separate entities for tax purposes. Most taxpayers who own a sole proprietorship must simply add Schedule C to their regular 1040 annual income tax return. It's extremely important to remember that sole proprietors must generally pay self-employment taxes on their earnings, typically at a rate of 15.3%.
For additional articles in the series:
- Starting a Small Business: Partnerships
- Starting a Small Business: Corporations
- Starting a Small Business: Limited Liability Companies