Top Mistakes Sole Proprietors Make

Opening a new business can be the best decision of your life–and one of the most complicated. If you are a current business owner, you probably wish someone had told you a few tips before you started so that you could learn from their mistakes. What are the top mistakes sole proprietors make?

If you are a new business owner, or you are thinking about opening a sole proprietorship, knowing this information can also be beneficial. To help you out, our business law team has compiled a shortlist of some mistakes sole proprietors make so that you know what not to do.

While every sole proprietor is different, here are a few things most have in common:

Mistake #1: Not Tracking Business Income and Expenses

Most business owners scramble toward tax season, compiling all the year’s receipts. It is easy to miss one when you do not have a system for tracking income and expenses. That can make you miss out on write-offs (especially in the home office) or result in penalties if you accidentally underreport your income.

Solution: Create an organization system for all your income and expenses for each year. You can do this on a Word document, Excel spreadsheet, note-taking tool, or app. A simple notebook will also suffice, as long as you can read your own handwriting. The notebook method will require data entry at tax time. 

The Internal Revenue Service offers guidelines for recordkeeping: https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping

Mistake #2: Forgetting to Pay Quarterly Taxes

Most sole proprietors are on a quarterly tax payment schedule. That means that you have to make estimated tax payments four times per year. Not sticking to that schedule can cause you to owe the Internal Revenue Service (IRS), and it can add up quickly.

Solution: Talk to the IRS or Department of Revenue (DOR) to confirm whether you need to pay quarterly. Then, create a reminder in your Google Calendar and phone to pay taxes by the following dates each year to avoid penalties.

• January 15
• April 15
• June 15
• September 15

Be sure to give yourself a few days of leeway in case something comes up.

Mistake #3: Ignoring Alternative Business Entities

Many new business owners create a sole proprietorship because it seems the easiest, and they do not think they will need a limited liability company (LLC) or S corp, for example. However, another business entity could be better suited for your business type. For instance, if your sole proprietorship is high risk and gets sued, your personal assets could be at stake, whereas your personal assets are not involved in lawsuits with an LLC.

Solution: Research the different types of business entities before opening a sole proprietorship. If you are already a sole proprietorship, it is possible to transition to an LLC or S corp. Contact an accountant or business law attorney if you have questions about which business type is right for you.

Consult a business law attorney today

Running a sole proprietorship can be confusing at times. You may have questions about your tax payment schedule, business entity options, and how to track your receipts and earnings.

Learn from other business owners’ mistakes, and adapt a few solutions today to get yourself ahead of the game. By staying organized, doing your research, and asking the right questions, you can ensure legal compliance and less stress come tax season.

Fill out our contact form and we’ll put you in touch with an excellent business law attorney near you.