A new study commissioned by the Small Business Administration finds that “sole proprietorships pay taxes at the lowest average effective rate, 13.3 percent. In comparison, small business partnerships have an average effective tax rate of 23.6 percent, while S corporations’ average effective tax rate is 26.9 percent, according to Quantria’s study of IRS data from 2004.” (Becker, H. ; nuwireinvestor.com)
That’s not the whole story though. Sole proprietorships account for 84% of small businesses with gross receipts under $25,000…which effectively makes their tax rate very low. By contrast, partnerships and S Corporations together make up a third of all small businesses with between $100,000 and $250,000 in gross receipts.
In my opinion, your business’s legal form should really depend on what services or product you offer, what industry you’re in, and most importantly what potential liability you may have. Whether your taxes are a bit lower or not is secondary. Unfortunately for any business owner today, the threat of frivolous lawsuits warrants careful review of your legal entity and most likely excludes the sole proprietorship as a viable entity.
For my business, Inland Accounting Services, I wouldn’t consider keeping it as a sole proprietorship; based solely on the need for protection of my personal assets from frivolous lawsuits. To me, that protection is worth the extra cost of maintaining the corporation and supposed extra taxes.
In the end, we all must decide for ourselves, but at least, let us be informed. Thanks for reading.
Inland Accounting Services – Staff
Hi, interesting post. I have been pondering this topic,so thanks for posting. I will certainly be coming back to your posts.
Glad to hear from you. Thanks.