馃攳
Sole Proprietorship (What's the Advantage?) - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
[0]
- Hey guys, Toby Mathis here
[2]
from Anderson Business Advisors,
[3]
and today we're gonna
talk about the advantages
[5]
of sole proprietors.
[7]
Now, I tend to look at sole proprietors,
[9]
and know that about
anywhere between 60% and 70%
[14]
of the small businesses
are organized that way,
[16]
and I scratch my head,
[17]
because they leave a lot
of money on the table.
[20]
But there's a reason
that there's 60 to 70%
[23]
of people that are doing them that way
[25]
that are opening their businesses.
[27]
And that's because they are flipping easy
[30]
to start just by saying,
"I'm in business."
[32]
So I could literally go outside today,
[35]
get a tool belt, and say I'm
in the plumbing business,
[39]
go out and start soliciting people,
[42]
and I'd get my business license,
[44]
depending on where I live.
[45]
And in some places you
don't even need that,
[47]
and I could just start running a business,
[49]
and say, "Go ahead and pay it to me.
[50]
"I am my business."
[51]
Because that's what a sole proprietor is.
[53]
A sole proprietor files all of their taxes
[58]
on your personal tax return
[60]
on a Schedule C.
[62]
So it's really easy.
[64]
In fact, I don't even have
[65]
to get a separate tax
identification number,
[68]
if it's just me.
[70]
I don't even have to change my name,
[72]
it could just be me.
[73]
I could just decide that
I am a business tomorrow,
[76]
I don't even need a separate
bank account, technically.
[80]
Now, all of that stuff
sounds really, really good,
[83]
and it's really easy,
[85]
but it comes at a cost.
[88]
Number one, there's really a blurred
[91]
of line between you and your business.
[94]
And as a result, the IRS loves
to attack sole proprietors.
[98]
In fact, if I have company A
set up as a sole proprietor,
[102]
and company B running as a S corp,
[105]
company A will be audited 1000% plus more.
[110]
Actually, in 2018,
[111]
the last years that I
have the current data for,
[114]
it was 1200% greater
for a typical business
[119]
making about $100,000 a year,
[121]
which is really, really ugly.
[123]
If it's a smaller business,
[125]
let's say that it's just the Joe Schmoe
[126]
making $40,000 a year.
[129]
It's still a multiple of
more than 400% higher,
[134]
which is kind of scary.
[135]
Now, here's the number that
freaks me out the worst,
[139]
is the sole proprietor loses that audit
[142]
more than 94% of the time,
[146]
which means like 9 times out of 10,
[149]
you could actually say that,
[150]
greater than 9 times out of 10,
[152]
you're gonna owe more tax.
[153]
And the reason is 'cause
there's such a blurred line
[156]
between the business and the individual.
[159]
So I tend to go do something else.
[162]
So I'll almost always create
some sort of structure,
[165]
even if you want to be
taxed as a sole proprietor,
[168]
I'm gonna create a bright
line around somebody,
[171]
I'm an attorney, that's what I do.
[173]
I don't wanna leave it to chance.
[174]
I'm gonna create an LLC,
[176]
or something along those lines,
[177]
and I could still treat
it as a sole proprietor,
[180]
I could make it disregarded
for tax purposes
[182]
where you just file the same Schedule C.
[185]
So if you are just keen on this idea
[189]
of being taxed as a sole proprietor,
[190]
'cause you have been told it's easier,
[193]
you could still do it that way.
[194]
But as an attorney,
[195]
I could never, ever tell
you it's a good idea
[199]
to operate a business in your name,
[200]
and the reason being is really simple.
[202]
Because you and your
business are one in the same.
[205]
So just as a sole proprietor is easy,
[208]
it's also easy for somebody to sue you
[210]
for everything that you have personally,
[212]
and follow you around
the rest of your life,
[214]
suing you every year,
[216]
then garnishing your wages
for the next 50 years.
[219]
It doesn't stop.
[221]
They literally can just keep
attacking you until you die.
[224]
Or you go bankrupt if the type
[226]
of debt that is incurred is dischargeable.
[229]
So it's one of those things
that can follow you around.
[232]
So you never, ever,
[234]
ever operate legally as
just a sole proprietor,
[238]
you always put some
sort of entity around it
[242]
to make sure that you don't find yourself
[244]
in a situation where you are
ruing the day you decided
[247]
to do business with somebody X,
[249]
or that you contracted with somebody Y,
[252]
or that you put yourself out there,
[254]
and maybe you did business
with somebody else,
[256]
and they ran off with all the money,
[257]
and left you with all the bills,
[258]
and the next thing you know,
[260]
it's following you around personally.
[262]
We would never do that,
[263]
we're always gonna create a line.
[265]
So let's just look at sole proprietor,
[269]
very, very easy.
[270]
If you want it to be easy tax-wise,
[273]
and again, there's justifications
[275]
in doing it a little more complex,
[277]
'cause you make more money,
which I'll go over in a second.
[279]
But let's say you just say,
[280]
"Boy, it's so easy, everything's easy.
[283]
"I just don't wanna
have to worry about it,
[284]
"I just wanna put it all
on my personal return."
[287]
Okay, but we're still
gonna draw a box around it,
[289]
and isolate the liability, okay?
[291]
We're still gonna do that.
[292]
Plus, we wanna have something
[294]
that doesn't die along with you.
[296]
If you're disabled, or if you pass away,
[298]
we wanna make sure that the business
[299]
does not die that same day.
[301]
It could be very, very problematic
[304]
if that occurs for your family,
[306]
or for anybody behind you,
[308]
or even your customers or anybody else,
[309]
as we want to have a nice vehicle
[312]
that is not you, no offense!
[316]
Now, the other side to this is,
[318]
sole proprietors, because they're easy,
[320]
they're also low-lying fruit.
[321]
And they pay the most in tax.
[323]
They pay something called
a self-employment tax,
[325]
and they have reduced deductions,
[327]
because if you're the sole proprietor,
[329]
you technically can't be an
employee of your company.
[332]
Something that we saw
recently with the pandemic
[335]
is that sole proprietors are treated
[338]
as second-class citizens
[339]
when it comes to relief,
[341]
when it comes to banking,
[342]
when it comes to loans.
[344]
They weren't even allowed to participate
[346]
in the first round of the
Paycheck Protection Program,
[349]
because nobody knew what to do with them,
[351]
and they didn't give
them any of the benefits
[353]
that were given to other businesses.
[355]
So it was very problematic
for the sole proprietor.
[358]
We're still seeing that and
it's always played itself out.
[362]
And that is because if somebody's
[363]
having difficulty
recognizing the difference
[367]
between you and your business,
[369]
what are the chances of them loaning
[371]
that business money when their fear
[374]
is gonna be that you're just
gonna take it personally?
[377]
It's a very valid fear,
[379]
especially if the money's
going into the same account,
[381]
so they are less likely to do
a traditional business loan
[385]
to that business.
[385]
What they're probably gonna do
[386]
is give you a loan personally,
[389]
and just let the business
[391]
put the business name on it,
[392]
or maybe something called a DBA,
[393]
or something like that along those lines,
[395]
and it's really just a
disguised personal loan.
[397]
The reason that's bad is now
[399]
that shows up on your
personal credit report,
[402]
and it can reduce your FICO score,
[404]
which makes credit more expensive for you
[407]
for things like your home loan,
[410]
even insurance rates go up.
[412]
So you want to make sure
[414]
that you're creating some separation,
[416]
and you also wanna take
advantage of some tax advantages.
[419]
One of the things about a sole proprietor
[421]
is that every dollar you earn
[422]
is subject to something
called a self-employment tax.
[425]
That is, in part, old age,
[428]
death, and survivors, social security,
[429]
and Medicare.
[431]
And it adds up to 15.3%.
[434]
Now, the old age, disability,
[435]
and survivors phases out when you get up
[438]
over about 137,000.
[440]
It adjusts annually, so
you'd check that out,
[442]
but it's around 137,000,
[444]
where it starts to phase out and just go
[446]
to the Medicare portion, which is 2.9%.
[449]
Well that 15.3 is a big chunk of money.
[452]
You could avoid about 2/3 of that,
[455]
simply by being an S corp.
[458]
And it makes life a lot easier,
[460]
saves you a lot of money,
[461]
and then you become an
employee of the S corp,
[463]
which opens you up to something
called an accountable plan,
[466]
which allows you to save even more money.
[468]
And I'll just put it
into perspective for you.
[470]
If you are a sole proprietor
making about $100,000,
[474]
and you're an S corp
making about $100,000,
[476]
the difference in
taxation between those two
[479]
is gonna be pretty close to 10%.
[481]
The S corporation is going to get
[483]
to keep about an extra $10,000 a year
[487]
that you're going to give up
[488]
because you were lazy and
you were a sole proprietor.
[490]
No, sole proprietor was so much easier!
[493]
But you left yourself
exposed liability-wise,
[497]
and then, you made it to
where you paid more in tax.
[500]
Again, the government's not stupid.
[503]
The government sets up rules,
[504]
and it creates incentives
to use a little bit
[507]
of elbow grease if you're willing
[508]
to jump through a few hoops.
[510]
Once you do that, you get
lots and lots of benefits.
[513]
And here is one of them.
[515]
So sole proprietors are easy,
[517]
but if you choose to go that route,
[519]
it will cost you extra money.
[522]
Now if you're making $10,000 a year,
[524]
you may say, "Eh, maybe
it's not worth it."
[527]
If you're making $100,000,
[529]
or 200 or $300,000 a year,
[531]
you're crazy to operate
as a sole proprietor.
[534]
I'll be the first one to tell you that
[536]
in case nobody's ever told you.
[538]
You're cuckoo for Cocoa Puffs.
[539]
You're nuts.
[540]
You should not be operating
as a sole proprietor.
[543]
You want to make sure that
you're taking advantage
[545]
of the tax code at that point,
[547]
and you need to grow up, and
actually become an S corp.
[549]
You could still be an LLC taxed
[551]
as an S corp if you love LLC.
[553]
You could be an LLC taxed
as a sole proprietor
[556]
if you're small enough,
[558]
if you look at it and say,
[559]
"Yeah, I'm willing to lose a little bit,
[561]
"'cause I don't wanna
go through the hassle
[562]
"of actually filing a
separate tax return."
[565]
By the way, the bookkeeping requirements
[567]
are identical between an
S and a sole proprietor,
[570]
and the tax return that
the S corporation files on
[573]
isn't harder than the Schedule C
[575]
that's part of your return
[577]
for your sole proprietorship.
[579]
So it's actually pretty funny
[580]
from somebody standing in my shoes,
[583]
I'm looking at it going, "Wait a second.
[584]
"They're not that much different."
[587]
But there's a huge difference
[588]
in both the tax benefit,
[590]
the legal separation of the
individual from their business,
[594]
their ability to get access to capital,
[596]
their ability to get access to loans.
[599]
By the way, don't even think,
[601]
you're not gonna have
partners in a sole proprietor.
[603]
You can't, you can't have
investors in a sole proprietor,
[605]
you just can't!
[607]
Literally, you cannot.
[608]
So it gets to this weird situation
[610]
where if you wanna grow,
[612]
you're bearing the burden
as a sole proprietor.
[614]
If you wanna grow as a
corporation or as an LLC,
[618]
it's much, much, much easier.
[620]
Now remember, the LLC can
choose however it wants
[623]
to be taxed.
[624]
So it could be an S corp,
[625]
it could be a sole proprietor,
it could be C corp.
[627]
But all of those things have
their pluses and minuses.
[631]
So if I go back to the very
beginning of this and say,
[633]
"Why do people still operate
as sole proprietors?"
[636]
It's because it's a default
[637]
when you operate as a
business and you do nothing.
[640]
And then because it's so easy,
[641]
all you have to do is nothing,
[643]
and you become a sole proprietor,
[645]
that's why so many people
are sole proprietors.
[648]
That, and I'll say there's
one last little thing,
[650]
and I'm gonna leave you with this.
[652]
There's a lot of accountants
[653]
that tend to be a little lazy,
[655]
and they don't know the difference,
[656]
so the default is,
[658]
"Hey, whatever you become.
[660]
"Whatever's easiest."
[662]
And with the IRS,
[663]
and in world in general,
[665]
what's easiest is rarely what is best.
[669]
(inspirational music)
Most Recent Videos:
You can go back to the homepage right here: Homepage