For the following reasons, you should never operate any business as a sole proprietorship

For the following reasons, you should never operate any business as a sole proprietorship

One of the great appeals of becoming an entrepreneur is the sense of "independence" that comes with it. Even if you identify as an independent entrepreneur, the issue of how you should structure and conduct your firm remains unanswered by that designation.

It is all too common for new freelancers to mistakenly believe that they are "single proprietors" because they are autonomous. Generally speaking, in the United States, this implies that you just conduct your company as an extension of yourself—you may set up a separate bank account, but you are really running your business as an extension of your own personality. Business profits are reported on Schedule C of your 1040 and business taxes are filed with your personal tax return as part of your personal income tax return. Other countries have systems similar to the United States; for example, in France, translators are more often than not independent members of the "professions liberales," or "liberal professions."

There is no doubt that establishing a single proprietorship is the most straightforward and straightforward method of starting a company. However, regardless of the jurisdiction in which you do business, this is not the manner in which you should conduct your company—even only to "get started."

Choosing any other alternative, which would include forming a legal organization distinct from yourselfsuch as a corporation or limited liability company—is much better than running your firm as a sole proprietorship in every way.

Consider the following: if we were to enumerate all of the benefits associated with being a single owner, we would reach the end of our list in a short period of time. Yes, it is straightforward. Isn't it true that it's less expensive? No, not at all. In fact, the simplicity with which it is possible to operate as a single proprietor provides us with our first hint as to why we should not be interested in doing so. The incentives for doing something that is so simple are not going to be substantial. What is worthwhile in business, as in life in general, almost always requires some effort on the part of the individual.

What seems to be a no-cost benefit in the case of a single proprietorship might turn out to be quite expensive in the long run. Even some specialists believe that single proprietorship is so harmful that it should be prohibited.

I don't think this is an exaggeration in the least. If you're starting your own company, you've most likely put money aside to cover the costs of getting started. A customer base takes time to develop, and the chances of failure are high in the early stages of business development. In the event that you have not taken the time to correctly organize your company by forming a distinct legal corporation, you run the danger of losing not just the funds you have put into the firm, but also everything you personally possess.

My first job offer as a freelance translator came from a translation firm in Paris when I was just starting. I still remember that day vividly. The fact that the agency was suing a freelancer for alleged "negligence" was shocking to me, so I looked them up on the payment practice lists to which I had subscribed. The agency claimed that the translator's alleged "negligence" had caused the agency to lose a large account, which I found to be absurd. The amount involved was in excess of 20,000 euros.

Now, if this agency were to be awarded a judgment against the translator, and the translator was operating his business as a sole proprietor and did not have the 20,000 euros in his business bank account, the judgment creditor (the agency) could attach the translator's personal assets, such as his personal savings, his automobile, and even his family's home, in order to satisfy the judgment!

If the translator had formed his firm as a corporation or limited liability company (LLC), his responsibility would be restricted to the amount of money he had in his corporation's or LLC's bank account as well as the company's other assets, if any. Moreover, if these corporate assets were unable to meet the verdict, the agency would be completely out of luck since it would be unable to get any of the translator's personal belongings.

Before you conclude that anything like this would never happen to you, have a look at the statistics. In the United States, one out of every four people gets sued, and one out of every five of those cases results in a terrible financial loss for the plaintiff. When asked whether they had been sued, over two-thirds of the individuals in attendance at a lecture I recently attended raised their hands. And keep in mind that the event I cited before involved a French government entity. This "could" happen to you, and in order to be safe, you must have organized your firm correctly "before" any litigation or threat of a lawsuit develops. If you do not, you will be exposed.

In addition to the important asset protection benefit, you will receive many additional significant benefits by establishing your company as a distinct legal organization. These include the following:

1. You will be able to take advantage of much greater tax breaks. A sole proprietorship, for example, can deduct only 25% of health insurance premiums, whereas a corporation can deduct 100% of similar expenses, depending on the circumstances.

2. You will have the option of dividing your earnings.Having a C company allows you to distribute revenue across numerous separate organizations, allowing you to lower your tax burden to the lowest tax level possible.

3. Using your business structure, you will be able to set up a retirement plan for yourself and your workers.

The possibility exists that your social security tax (FICA) due will be greatly reduced.

5. If you do all of your company with customers located outside of your home state, forming a Nevada corporation may be advantageous in addition to other ways. Nevada not only has no state income tax on company earnings, but it also provides further asset protection to both U.S. citizens and non-citizens by enhancing the privacy of their financial transactions.

But isn't forming a company a time-consuming and costly undertaking? This is a question I am often asked. The quick answer to this question is "No." The long answer is "Yes." You have the option of forming a company in which you serve as the directors and officers. And, because of the wealth of information and tools accessible on the internet, it has never been simpler or more cost-effective to get your corporation or limited liability company up and running effectively.

Don't make the mistake of doubling or tripling your risks and long-term expenditures. Simply put, don't do it! Get the information you need to get your company up and running as soon as possible.