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The Pros and Cons of Maryland Sole Proprietorships
In general, sole proprietorships in Maryland can be established with no formalities. with the exception it may be necessary to obtain one or more state and local business licenses from cities or counties in which the business operates. No separate tax form filing is required, generally, for a sole proprietorship, under the Maryland income tax law. Instead, similar to the federal income tax scheme, owners report the net income or loss from a sole proprietorship on their state personal income tax returns.
Operating as a sole proprietor in Maryland is much simpler than as any other kind of business legal entity. As a sole proprietor without employees is not required to pay any unemployment taxes, withhold any federal or state income tax from wages, or obtain workers' compensation coverage. Following are the main Pros and Cons of operating as a sole proprietor.
Pros
- Easy to Organize: The great advantage of operating a new business as a sole proprietorship is that it is simple and does not require any formal action to form. Owners may start business operations immediately -- there is no need to wait for an attorney to draft and file documents or for the government to approve them.
- Profit (or Loss) Is Yours: All of the profit or loss from a sole proprietor inures to the business owner directly and is reported on a personal federal income tax return, Schedule C, Income (or Loss) from a Business or Profession, on Form 1040. This can either be an advantage or a disadvantage for income tax purposes, depending on the circumstances. If operating the business results in losses or significant tax credits, owners may be able to use the tax losses or tax credits to reduce taxes on income from other sources. If the sole proprietorship generates modest profÂits -- but not more than about $75,000 to $100,000 a year -- overall taxes may be less than if the businesses is incorporated.
- No Entity-Level Federal Taxes on Income: Unlike a corporation, there is no possibility of double taxation of a sole proprietorship, for federal tax purposes.
- Unemployment Tax Savings: A sole proprietor is not considered an employee of the business. As a result, owners avoid paying unemployment taxes on earnings from the business. Both the state and federal governments impose unemployment taxes on wages or salaries, but not on self-employment income.
- Ability To Withdraw Assets Tax-Free: Another advantage of a sole proprietorship is that funds may be transferred in and out of your business accounts or assets withdrawn assets from the business with few tax, legal, or other limitations. In a partnership or a limited liability company, owners can generally withdraw funds only by agreement and, in the case of a corporation, a withdrawal of funds or property may be taxable as a dividend or capital gain or may violate some states' corporation laws, potentially causing a loss of limited liability protection from business creditors.
Cons
- Personal Liability: The owner of a sole proprietorship will be personally liable for any debts or taxes of the business or other claims, such as legal damages resulting from a lawsuit. This is one reason why many entrepreneurs prefer to use a corporation or limited liability company rather than a sole proprietorship. Unlimited personal liability is the major disadvantage of operating a business as a sole proprietorship.
- Limited Tax Savings for Fringe Benefits: A major disadvantage of sole proprietorships (and partnerships) is that they cannot obtain a number of significant tax benefits regarding group-term life insurance benefits, long-term disÂability insurance coverage, and medical insurance or medical expense reimbursements. To qualify for favorable tax treatment regarding these fringe benefit plans, you need to incorporate. A self-employed individual is allowed to deduct 100% of his or her health insurance when computing adjusted gross income. However, the health insurance deduction only reduces one's income tax, not the federal self-employment tax.
- Lack of Continuity of the Business May Make It Harder to Borrow Money: Compared to a corporation or LLC, a sole proprietorship lacks any continuity of existence, if the proprietor dies, while a corporation continues on after deaths of its stockholders. For that reason, banks or other lenders are often much more hesitant about lending to sole proprietors than to corporations or other legal entities.