If credit is used in your business operations, it¹s particularly important to maintain a separation of finances and records for your business unit and your household. Interest payments on personal debt are not a deductible expense for federal and state income tax purposes, while interest payments on business borrowing can be fully deductible.
When business and household costs are incurred jointly (for example, telephone bills when the telephone is used for personal and business calls, and travel using a personal auto for business purposes), allocate the respective portions to the business unit and the household. Then pay the business and personal amounts from the respective bank accounts. A relatively small investment of effort in bill paying and record keeping can ensure you have the data needed for filing and substantiating your income tax returns.
Advantages of the Sole Proprietorship
- In large part, the advantage of the sole proprietorship is in its simplicity and flexibility.
- A sole proprietorship can be established, modified, bought, sold, or terminated very quickly.
- No business planning or organizational arrangements are required when a sole proprietorship is established. Of course, that can also work to your detriment.
- A sole proprietorship involves minimal legal formalities and registration requirements to begin and maintain.
- A sole proprietor has total autonomy or decision-making authority.
- A sole proprietor enjoys all the income of the school.
- All school assets (equipment, inventory, property, etc) are owned by the sole proprietor.
Disadvantages of the Sole Proprietorship
- As a sole proprietor, you are personally responsible for all liabilities (losses, debts, expenses) created by the school. Therefore, the sole proprietor is personally responsible for all contracts and financial responsibilities created by the school including the actions of the school's employees. If there are any lawsuits against the school, you will be personally liable for any judgment. As such, your personal assets, such as your automobile, house and bank accounts are at risk of being seized by anyone obtaining judgment against your school.
- Income or loss from your school must be included with your other sources of income during the year. As a result, you may be subject to paying more income tax than if another method of conducting business is used. However, in some cases, the ability to apply losses to your personal income may be an advantage of a sole proprietorship, especially if there are other sources of income.