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Asset Protection & Business Planning

Problems With a Sole-Proprietorship

Many business owners still operate as Sole-Proprietorships and are completely unaware of the risks they are taking and the benefits they are missing out on. Today, more and more companies are incorporating or creating Limited Liability Companies (LLC) to protect their assets and obtain possible tax benefits. The following are some of the drawbacks of having a Sole-Proprietorship and benefits of doing business in another form.

Major Disadvantages of Sole-Proprietorships:

1. All ordinary net income is subject to self-employment tax of 15.3%.
2. The proprietor's personal liability is unlimited. If the company is sued all of the owner's assets are in jeopardy.
3. A proprietor's ability to raise capital is limited to their personal funds and through loans.
4. Automatically dissolved upon the owner's death.

Advantages of Creating an S-Corporation, C-Corporation or LLC:

1. Under a Corp or LLC form of doing business, the liability is limited to the amount invested and capital contributed. The owner's personal assets are protected from 3rd party liability.
2. In an LLC the entity does not pay taxes. Profits are passed through to the members who pay personal income tax. Additionally, the owner can avoid a separate tax return, however, self-employment tax can be an issue.
3. Under an S-Corp, the entity also does not pay taxes. Profits are passed through to the shareholders who pay seasonal income tax. A tremendous advantage is that the earnings can be split between salary and dividends and the owner can save some portion of paying the dreaded Self-Employment Tax.
4. An LLC can offer flexibility like a "partnership", and can help the business owner raise capital through partners or investors.
5. Even though C-Corp income is subject to corporate tax, utilizing a C-Corporation can, in some instances, provide opportunities for a business owner and their family to enjoy increased deductions for fringe benefits and/or medical expenses.