Sole Proprietor vs Corporation - which is best for my business?

The question of whether to run your business as a Sole Proprietorship or a Corporation is not easy for most business owners. 

Other entity types include Partnerships, LLCs, Trusts, and more.

So how do you know which is the best for your business?
Most businesses start as Sole Proprietors because it is the simplest entity form and only requires a Social Security number to start. All City, County, State and Federal agencies will use your name and Social Security number for taxes, licenses, and banking.

But as your business grows, you will want to look at other business entity forms to add more legal protection and possibly lower the taxes you pay. 

You should always ask for advice from your Attorney and CPA as your unique situation may have legal and tax matters you will want to consider.

The first question to ask yourself is:  

Will I be the sole owner or will I have partners in this business?

Partnerships, LLCs, and Some Corporations are better entity types for businesses with partners or multiple owners. These entities can be broken down into percentages of ownership and taxed on that basis. Also, each partner will share in the debts and legal liability of the business at the percentage they own.

Sole Proprietors, Corporations, and S-Corps are generally used in single-owner businesses. 

What entity type has the best taxation rules for my business?

When you create a Corporation, S-Corp or LLC,  you create a separate tax entity with it's own Tax ID (FEIN). Now you will file a Corporate Tax and a Personal tax return each year. In California, a Corporation has a minimum Tax of $800 per year.  However a Corporation can have more tax deductions than a sole proprietor and as the business income increases, can cost less in taxes in most cases.  This is where the advice of a good CPA is so valuable. 

Ex:  You can own a building under your personal name and have your corporation pay you rent.

Which Entity protects my assets better?

Another advantage of a Corporation is that you can shield your assets if you are being sued to a greater extent. And here is why having an attorney set up your Corporation may save you money in the long run.

EX: If your Corporation is sued for a mishap, but your building is owned under your personal name or another entity.  In most cases, it is better protected.

If I were to die, how would the business pass to my heirs? 

As a Sole Proprietorship, your business would pass to your spouse (depending on State law) and if you did not have a spouse, it would go through the probate court and be decided there based on your Will or Family Trust.

Entities such as Corporations do not die. Control of the Corporation will pass to the person/s that owns the most shares of stock. Your Will and Trust again play a big role in the transfer of Control.

This is only the beginning of this conversation, be sure to ask your CPA, Attorney and Insurance Advisors the questions that pertain to your unique situation.