A sole proprietor has unlimited liability for the debts of the business. The sole proprietorship is taxed at the owner's individual tax rate. Since a sole proprietorship has one and only one owner, the management style is self-directed. In other words, the sole proprietor reports only to themself.
You don't have to file any paperwork with your state or the IRS to form a sole proprietorship. However, you will need to get a business license from the city, county or both in which you operate your business. You'll probably need to get a sales tax certificate from your state department of revenue as well.
Note: Depending on how it's set up, a limited liability company can be a sole proprietorship, flow-though or corporation.
Click on the link above to find out more about sole proprietorships!
Many businesses incorporate because corporations do have limited liability. With few exceptions, the shareholders and officers of a corporation are not liable for any corporate debts.
Incorporating a business is handled at the state level. To incorporate your business, you normally file paperwork, called articles of incorporation with your secretary of state. Most states require this filing be renewed yearly. The amount all this costs will differ depending on where your business is located.
Any net income is taxed at the corporate tax rate. The management style is centralized. Shareholders vote in the board of directors who select the managers to run the company.
Some people opt to incorporate their business in certain states for perceived cost and legal issues. Maintaining out of area incorporation is really too much hoopla for the typical arts and crafts business.
I know none of my clients (or myself for that matter) go this route. I recommend keeping it simple by staying local with all your business filings.
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There are a few different types of flow-through entities. You're probably most familiar with the partnership, S-Corporaton or limited liability company.
If you plan to go this route, out of the three, I find the S-Corporation the type of flow-through entity most easy to manage. Although a partnership has to have at least two partners, an S-Corporation needs to have only one shareholder. The number of additional shareholders is limited by current internal revenue code. Unless you have more than 100 shareholders in your arts and crafts business, you'll be fine.
Liability, taxation and management style will vary based upon type of flow-through entity. This is something you have to carefully consider prior to going with the partnership type of flow-through especially.
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