Running a business in a Sole Proprietorship is easy. It’s the default if you start a business and don’t get around to selecting a business structure for the business. And it’s also the default if you have a single member LLC and don’t elect a business structure.
A Sole Proprietorship is also deceptively easy. You don’t have to keep your financial records with a double entry bookkeeping system. You can use the ol’ shoebox method and commingle to your heart’s content. Of course, you have no asset protection, pay more in taxes and now have a HUGE possibility of audit. (Look for 1 in 3 Sole Proprietorships being audited in 2009.)
So, how do you fix it? Form an LLC and elect to be taxed as an S Corporation or a C Corporation. There is more work involved because now you have to run it like a grown-up business, keeping true accounting records. And if you draw money out of the company, it comes out as salary, benefits or distributions (or dividends). So, you need to plan ahead a bit.
The extra work, though, means that you’ll have better books and records for your company and that can make you a better business owner.
One more thing to remember: Document! Document! Document! When you form the new entity, make sure you properly transfer all of your assets into the new entity. This one comes up a lot with new clients – how did the assets move from one entity to another?
You need to have a bill of sale like the #32 Bill of Sale contract from Megan’s “97 Contracts Your Business Can’t Live Without.”