And in these credit-strapped times, he "may be at a disadvantage in raising funds" as sole proprietors cannot issue bonds or sell shares of stock -- they are "often limited to using funds from personal savings or consumer loans" (Sole proprietorship, 2009, Residual Rewards). Even in terms of his tax returns, the law does not always favor sole proprietorships: some employee benefits such as owner's medical insurance premiums are not directly deductible from business income and are "only partially deductible as an adjustment to income" (Sole proprietorship, 2009, Residual Rewards). There are also different rates of taxation for the two entity types: "a corporation pays 15% federal income tax on taxable income up to $50,000; 25% tax on income from $50,001 - $75,000; 34% tax on income from $75,001 - $100,000; 39% tax on income from $100,001 - $335,000; and 34% tax on income over $335,000" while a married sole proprietor "would pay 15% federal income tax on taxable income up to $35,800; 28% tax on income from $35,801 to 86,500; and 31% tax on income over $86,501" (Sole proprietorship, 2009, Residual Rewards).

But, Marcus wails, I don't want to be liable for my business' debts, yet I have no prospective business partners! Also, I am not large enough to incorporate, nor would I want to lose that control over my business to shareholders! There is...

This is a relatively new type of "hybrid business structure" that provides the limited liability features of a corporation but the tax status and flexibility of a proprietorship (Sole proprietorship, 2009, Residual Rewards). "The owners are members, and the duration of the LLC is usually determined when the organization papers are filed. The time limit can be continued if desired by a vote of the members at the time of expiration" (Sole proprietorship, 2009, Residual Rewards).
While the formation of an LLC is more complex and legally time-consuming than a sole proprietorship, the fact that Marcus will have only limited personal liability for business debts is a tremendous advantage: his profits and losses can be accounted for separately and current IRS rules allow LLCs to choose between being taxed as partnerships or corporation, which means Marcus can select whatever is most advantageous to him, financially, at this point in time of his business' lifespan. It is also a good idea if Marcus begins with structuring his company as an LLC, given that it is difficult for a sole proprietor to transform his business into an LLC, and he will bear additional tax consequences if he does so (Sole proprietorship, 2009, Residual Rewards).

Works Cited

Sole proprietorship vs. partnership…