Today's entrepreneur has so many options when it comes to virtually any aspect of starting and running a business. There are all these exciting new sources of capital and twists on traditional means of getting external investment, and you don't need an office-- or even employees-- to run a small media conglomerate completely out of your home or perhaps a series of short-term sublets, digital nomad style.
Because of all this, more entrepreneurs are no longer seeing rapid growth and a five-year plan to the IPO stage as a be-all, end-all. Small is good, micro even better. The technology and business environment are there to make it happen now, but as culture and values also shift to putting family, friends, and community above growing a massive empire, it also means we're only going to see even more entrepreneurs keep it small or stay solo.
Choosing the Right Entity When Staying Small
According to census.gov, the US gained more than four million non-employers over the last decade. A non-employer is defined by the Department of Labor as a business that has at least $1,000 in gross receipts and no employees, regardless of what entity it is. Non-employers/solopreneurs are surging in all industries with the rise of the gig economy and the fact that it doesn't require nearly as much capital as it once did to start a business.
Entrepreneurs can save a lot of money in income taxes, franchise taxes, filing fees, and other expenses involved in maintaining a business entity by not having the pressure to start an investor-friendly corporation right away in order to make onboarding seamless. By keeping operations small and agile with just one or two owners, there's more time to explore which entity will make the most sense for the type of business being started and other important considerations like the owners' additional income sources and personal needs that would make one entity more advantageous than another. In keeping things on a micro level, there isn't even much pressure to incorporate at all and simply report earnings on a Schedule C when keeping costs down at the beginning.
While there are liability concerns with operating unincorporated, solopreneurs still have the choice to operate as a solo S or C corporation which may suit their situation depending on other income sources and type of business. The flexibility remains for taking on partners and investors in due time, but they don't have to account for it now and pay an unnecessary amount of franchise taxes on a capital structure that isn't being fully utilized.
Home-Based Solopreneurs Are on the Rise
Today's technology lets more entrepreneurs become solopreneurs what with the portability and ease of using apps and cloud systems to both operate businesses and have professional support -- like lawyers and accountants get real-time updates on contracts and the books. There are apps for everything from keeping detailed mileage logs for tax purposes to creating and signing contracts on the go. Apps and software subscriptions are tax-deductible as well, along with other important aspects of running your business. For entrepreneurs who haven't yet gotten to the stage of having separate bank accounts for personal and business usage, there are also apps and tools for helping separate business and personal transactions. This is extremely important to keep audit risk low and also make tax filing time go much more smoothly.
Home-based businesses, in particular, are on the rise as office space becomes an unnecessary expense when so many facets of operations can just be done from anywhere with an internet connection. In using your home for business, you can also get a tax deduction for a percentage of your rent or mortgage and utilities. You need to meet the "regular and exclusive" tests in order to take this deduction regardless of whether you use the actual costs or the simplified method (which is $5 per square foot and maximum of 300 square feet, or $1,500) so you'll have difficulty proving your space qualifies if you frequently use co-working space or an external office or are a digital nomad who moves around frequently. But one doesn't have to work in an office anymore to have a small business earning well into seven figures, and you can even get some tax breaks for working from the comfort and privacy of your own home.
The phrase "go big or go home" is having less relevance among today's entrepreneurs. As more people are looking to start their own business out of a desire for independence and more control over their time which a job won't provide, they've become aware that exponentially growing a business to the point of needing a staff and outside investment may simply lead to a lifestyle they don't care for. There's much to enjoy in keeping it small.
Sonu Shukla, CPA writes for TaxBuzz, a tax news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
