5x: IRS audit chances if you are a…

Small businesses come in many different shapes and sizes but, there are normally only a few different types of business entities.  Before you choose yours, understand there is one to avoid if at all possible. The Sole Proprietor. This form of business is the easiest and cheapest way to be in business. (Easy and cheap gets you just that, easy and cheap!) So here are a few really good reasons NOT to be a Sole Proprietor:

  • According to Nav.com, you are 5 times more likely to be audited as a Sole Proprietor as opposed to those who are LLCs or are incorporated.
  • You cannot get business credit. A Sole Proprietor is you, not a business so, your personal credit is all you have to work with.
  • You are personally liable for the actions of the business because YOU are the business so all your personal assets are at risk if you are sued.
  • You don’t sell a stake in your Sole Proprietorship, you create a General Partnership – so now you are personally liable for all partners’ actions as well!
  • When you pass away, so does the business.  Remember, you are the business.

So hopefully, you are convinced not to become a Sole Proprietor and consider a more formal business entity. It may not be as easy and cheap up front, but it’s a lot more pleasant (and less expensive) than sitting down at the table with the IRS!

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