Individual Proprietorship by fionan

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									Proprietorship
The economic value of self-employment is quite
significant:
• Based on current income figures, an owner of a
  practice (solo) can expect to earn $1,000,000 more in
  income over 30 years than an employee; for
  partners, the difference is more than $2,000,000 in
  income compared to an employee
• The owner of a practice has a valuable asset worth
  about $300,000 (based on average current income
  levels) that can be sold to finance retirement
• Practitioners who own a building may rent or sell it
  at retirement to produce additional income
There are five basic types of business
organizations available:

•   individual (sole) proprietorship
•   general partnership
•   limited liability company (LLC)
•   professional association or corporation (PA or PC)
• subchapter S corporation
The choice of type of practice determines the
cost, complexity, and administrative burden
to be borne by the practitioner.

Sole proprietorships are the easiest to form
and operate, while corporations are the most
expensive and time-consuming.
The type of business organization influences
income potential: on the average sole practitioners
earn less than practitioners in partnerships or
groups.

According to the 2007 AOA Economic Survey
(2006 data), mean net income was:

--$175,329 for all self-employed optometrists
--$134,094 for sole proprietors
-- $176,944 for partners (2 optometrists)
-- $179,205 for optometrists in group practices (3
    to 5 optometrists).
Business organizations also determine liability
exposure: sole proprietors have the most
exposure, while practitioners in LLCs,
Subchapter S corporations, and PAs/PCs have
the least.

The basis for this difference is that in a sole
proprietorship the optometrist and the
business organization are merged—there is no
separate business entity that is responsible for
the optometrist.
Retirement plans are also dictated, to some
extent, by the choice of business organization.

The type of plan to be used, its cost, and the
benefits available are affected by whether a
practitioner is incorporated or not, although
differences have diminished greatly over the
past few decades.
Tax writeoffs and benefits are also dependent on the
type of business organization that has been selected.

Generally speaking, the more complex the business
organization, the greater the availability and number
of tax deductions that may be utilized by the business.

Also, sole proprietorships, partnerships, LLCs, and S
corporations pay no income taxes: professional
associations or corporations do. Thus the choice of
business organization is a key aspect of tax liability.
Optometrists have traditionally been entrepreneurs who
have tended to operate solo practices so that they could
“be their own boss".

However, with the increased emphasis on health care in
optometry, the high costs of instrumentation and of
operating an office, there has been a change away from
solo practice and toward partnership. Still, according to
the 2005 AOA Economic Survey, about 49% of
optometrists in private practice are solo.

Individual proprietorship remains the easiest, least
complicated, and most direct choice of business
organization. There are distinct advantages and
disadvantages to this form of doing business.
                        Advantages

One person rule, with control over decisions and destiny.
High long-term income potential and great equity potential.
Independence, with control of the office schedule, time off,
vacations, and similar matters.
Choice of optometric specialties to be practiced.

                       Disadvantages

The pressure of all decisions and management and marketing
responsibilities lies on the shoulders of the practitioner.
Multiple financial risks and competitive challenges.
Lower starting income, higher start-up costs are present.
Lack of office coverage in cases of illness, vacation, time off, etc.
Fewer specialties to offer.
In an individual proprietorship, the
individual and the practice are merged as
one: there is no separate business entity,
rather the practice is constituted in the
person of the practitioner.

All income is the individual’s income, all
expenses are the individual’s expenses, and
any profit or loss is reported by the
individual.
To begin a practice, the sole practitioner
must:
•   have a state license
•   secure federal and state tax identification numbers
•   obtain a business license (required in most municipalities)
•   open a business checking account
•   enroll as a provider for Medicare, Medicaid, and third-
    party plans in the community
•   prepare the proper paperwork to begin withholding federal
    and state taxes
•   open an account in a federal bank for the deposit of federal
    taxes
•   obtain state sales or use tax forms for reporting of taxes (in
    states that tax ophthalmic goods)
•   notify insurers of the date that operations begin
Liability for the practice rests solely on the
shoulders of the proprietor, who is responsible
for all contracts, tax matters, and legal issues
(such as liability claims).

The proprietor is individually liable for these
matters and liable for the acts of employees as
well.
With respect to taxes, the income earned by
the practice is taxed to the practitioner; the
individual proprietorship pays no taxes.

The profit (or loss) of the sole proprietorship
is calculated on Schedule C, and the result is
entered on Form 1040.

The practitioner pays taxes on this amount,
which also determines Social Security and
Medicare taxes.
              Retirement Plans

Individual retirement accounts (IRAs) may be
established regardless of any other type of
retirement plan a practitioner may have.

Retirement plans (such as IRAs) are discussed
in Chapter 33 of the textbook.
There are 5 types of IRA:

• Traditional
• Roth
• Simplified Employee Pension (SEP)
• Savings Incentive Match Plan for Employees
  (SIMPLE)
• Educational (Coverdell)
 Traditional Individual Retirement Accounts
                    (IRAs)
• For 2008, up to $5,000 a year may be placed
  in an IRA by employed or self-employed
  individuals under 50 years of age, and
• An additional $5,000 may be contributed by
  a married couple filing jointly, even if there
  is a non-working spouse--$10,000 total.
• For individuals 50 years of age and older,
  these limits are higher by $1,000 ($6,000 in
  2008).
 Traditional Individual Retirement Accounts
                    (IRAs)
• The money placed into the IRA is invested and thus
  generates earnings.
• The IRA's earnings are tax sheltered (not taxed)
  until withdrawn.
• Withdrawals must begin between the ages of 59 ½
  and 70 ½ years or a penalty will be imposed.
• Withdrawals can also be made at death or
  disability without penalty.
• Withdrawals can be held for 60 days when "rolling
  over" one IRA account to another IRA account.
• IRAs can be used even if there are other retirement
  plans, regardless of type of business organization.
 Traditional Individual Retirement Accounts
                    (IRAs)
• Contributions to an IRA can be deducted from
  taxable income (and thus not taxed) if the
  taxpayer making the contributions is not covered
  by an employer-maintained retirement plan.

• Thus a self-employed practitioner can make tax-
  deductible IRA contributions.

• So can an employee (e.g., an associate).
 Traditional Individual Retirement Accounts
                    (IRAs)
• For 2008, if a taxpayer is covered by an employer-
  maintained retirement plan the taxpayer can deduct
  the IRA contribution in full if:
  -- the taxpayer is single and earns $53,000 or less;
  -- the taxpayer is married and the couple earns
       $85,000 or less.
• If the taxpayer’s income exceeds these limits, IRA
  contributions can still be made (to an income
  ceiling), but they cannot be deducted in full.
 Traditional Individual Retirement Accounts
                    (IRAs)
• A partial tax deduction is permitted if:
  -- a single taxpayer earns more than $53,000 and
     less than 63,000 (example: if $58,000 is earned,
     $2,500 (50%) may be deducted)
  -- married taxpayers earn more than $85,000
     and less than $105,000 (example: if $90,000 is
     earned, $3,750 (75%) may be deducted).
 Traditional Individual Retirement Accounts
                    (IRAs)
• For a married couple filing jointly, if the taxpayer
  is covered by a employer-maintained retirement
  plan, and the spouse is not, the spouse can
  contribute $5,000 to an IRA and claim it as a tax
  deduction if the adjusted gross income of the
  couple is less than $159,000.
• A partial tax deduction is permitted if the couple
  earns more than $159,000 and less than $169,000
  (example: if $166,500 is earned, $1,250 (25%) may
  be deducted).
 Traditional Individual Retirement Accounts
                    (IRAs)

• Penalty-free withdrawals before age 59 ½ are
  permitted for:
   – eligible higher education expenses;
   – unreimbursed medical expenses;
   – buying, building or rebuilding a first home (up to
     $10,000).
• However, a 10% tax penalty may be imposed under
  other circumstances.
Don’t underestimate the power of an IRA—to
 have a million dollar nest egg at retirement:
•   Start at age 25
•   Contribute $5,000 a year for 40 years
•   That’s $200,000 worth of deductions
•   Assume 7% interest
•   Total is $1,068,047!
•   The key is to start early and use the power of
    compound interest
 Contributions to an IRA: Projected Growth*
Period              5% Growth*           10% Growth*
After 5 years       $29,009              $33,578
After 10 years      $66,033              $87,655
After 15 years      $113,287             $174,748
After 20 years      $173,596             $315,012
After 25 years      $250,567             $540,908
After 30 years      $348,803             $904,717
After 35 years      $474,181             $1,490,634
After 40 years      $634,198             $2,434,259

  *calculated at $5,000 a year contributions

  At $10,000 per year, the 40 year returns are $1,268,397 (5%)
  and $4,868,518 (10%)
  Roth Individual Retirement Accounts

• A Roth IRA is different from a traditional IRA in
  that contributions to a Roth IRA cannot be
  deducted from income. However, the account grows
  tax-free and withdrawals from the account are tax-
  free.
• Also, there is no age restriction for contributions
  (which may continue as long as income is earned,
  whereas 70 ½ is the limit for traditional IRAs).
• However, there are income limits that restrict
  eligibility for Roth IRAs.
  Roth Individual Retirement Accounts
• For 2008, the annual amount that may be
  contributed to a Roth IRA is $5,000 for persons
  under 50 years and $6,000 for persons 50 years of
  age and older. This amount must be reduced by
  any contributions to a traditional IRA.
• Contributions can be made for a non-working
  spouse as long as the income requirements are met;
  thus a married couple can contribute up to $10,000.
  Roth Individual Retirement Accounts
• Individuals may contribute to a Roth IRA if they
  meet the following taxable income requirements
  (for 2008):
  -- for single taxpayers, an adjusted gross income
      of less than $101,000; a partial contribution is
      permitted if the individual earns more than
      $101,000 but less than $116,000 (example: if
      $108,500 is earned (50%), $2,500 may be
      contributed).
  -- for married taxpayers filing jointly, an adjusted
      gross income of less than $159,000; a partial
      contribution is permitted if the couple earns
      more than $159,000 but less than $169,000
      (example: if $162,000 is earned (30%), $3,500
      may be contributed).
Roth Individual Retirement Accounts

Distributions from a Roth IRA may be
made without penalty after age 59 ½ , or
before that age if for disability, death, or a
qualified special purpose distribution.

This latter category permits withdrawals to
buy, build or rebuild the main home of a
first-time homeowner ($10,000 limit).
The power of a Roth IRA is demonstrated by
my son Christophe’s “summer job” IRA:

• Opened a Roth at age 15 years
• Average contribution $2,000
• Pays minimal income tax
• Will make contributions only through age 25 (11
  years), then stop
• Earning 9% interest (until 2008!)
• At age 65 the total will be $1,202,384
• And it’s tax free when withdrawn!
  Simplified Employee Pensions (SEP IRAs)

• SEPs are a form of Individual Retirement Account
  (IRA) usable by any type of business organization.
• A self-employed practitioner who contributes to an
  SEP may deduct the amount contributed from
  taxable income.
• For 2008, up to 20% of the practitioner's net
  income, to a maximum of $46,000, may be
  contributed each year to the SEP. Example: if net
  income is $230,000, the maximum contribution
  allowable would be attained, $46,000.
  Simplified Employee Pensions (SEP IRAs)

• The percent to be contributed annually to an SEP
  is set by the practitioner and thus can be varied
  each year.
• There is minimal cost and formality compared to
  other plans.
• Like other IRAs, contributions are invested and
  produce earnings.
• The earnings are tax sheltered until withdrawn.
  Simplified Employee Pensions (SEP IRAs)

• Withdrawals from SEP IRAs must begin between
  the ages of 59 ½ and 70 ½ or a penalty will be
  imposed.
• Withdrawals can also be made at death or
  disability before 59 ½ without penalty.
• Withdrawals can be held for 60 days when
  "rolling over" an SEP IRA.
  Simplified Employee Pensions (SEP IRAs)

• SEP IRAs may be established for employees.
• The percent contribution is set by the employer.
  The amount contributed is a tax deductible
  business expense for the employer.
• Vesting (the right to accrued earnings in excess of
  what has been contributed) is immediate (100%
  vesting). Example: an employee has contributed
  $10,000 to a SEP IRA, which has earned $1,000 in
  interest; if the employee leaves, the entire $11,000
  account belongs to the employee.
Savings Incentive Match Plans for Employees
                 (SIMPLE)

• A SIMPLE IRA can be established if there is no
  other retirement plan for employees. (An employee
  may still contribute to a personal IRA—but it
  cannot be a Roth IRA.)
• Although intended as a benefit for employees,
  employers who are also employees (as in a PA/PC,
  S corporation) can participate in a SIMPLE IRA.
• Under the plan, an employee may elect to place a
  percent of salary, not to exceed $10,500 per year (in
  2008), into an IRA account. The employer also
  contributes to the plan.
 Savings Incentive Match Plans for Employees
                  (SIMPLE)
• One option is to make matching contributions. The
  employer matches the employee's contributions, on
  a dollar-for-dollar basis, from 1% to 3% of the
  employee's income.
• Example: an employee earning $25,000 contributes
  5% of salary ($1,250) to the SIMPLE IRA. The
  employer pays 3% ($750) as a matching
  contribution. The total amount contributed to the
  employee's SIMPLE IRA is $2,000.
• The employee's contributions are excluded from
  gross income, and the employer's contributions are
  deductible as a business expense. Earnings are tax
  sheltered until withdrawn.
Savings Incentive Match Plans for Employees
                 (SIMPLE)
• The other option is to make a non-elective
  contribution of 2% of the employee's income.
• Example: an employee earning $25,000 chooses not to
  make contributions to the SIMPLE IRA. The
  employer pays 2% ($500) as a non-elective
  contribution. The total amount contributed to the
  employee's SIMPLE IRA is $500.
• The employer's contributions are deductible as a
  business expense and are tax sheltered until
  withdrawn.
Savings Incentive Match Plans for Employees
                 (SIMPLE)
• Persons who are age 50 or older can make "catch-
  up" contributions; for 2008 the “catch up” amount
  is $2,500, which means a total of $13,000 ($10,500
  plus $2,500) can be contributed by employees 50
  years and older.
• Withdrawals from a SIMPLE IRA are subject to
  the same rules as for traditional IRAs (they can be
  made without penalty between 59 ½ and 70 ½).
               Education IRAs
   (Coverdell Education Savings Accounts)

• Education IRAs are not retirement accounts; they
  are custodial accounts created for the purpose of
  paying “qualified” higher education expenses for
  the beneficiary of the account.
• The beneficiary must be a child under age 18
  years.
• Like an IRA, the contributions are invested and
  provide earnings.
               Education IRAs
   (Coverdell Education Savings Accounts)
• the definition of "qualified expenses" under an
  education IRA includes tuition, fees, books,
  supplies, and equipment incurred with enrollment
  in a secondary, public, private or religious school
• room, board, uniforms, and transportation
  expenses which are required for enrollment in a
  secondary, public, private or religious school will
  be considered "qualified expenses"
• computer technology, equipment, or services
  purchased for use by the account beneficiary
  (student) while the beneficiary is in school will also
  be considered "qualified expenses"
               Education IRAs
   (Coverdell Education Savings Accounts)
• For 2008, a maximum of $2,000 per child may be
  contributed each year by single taxpayers with a
  modified gross income of less than $95,000, and a
  partial contribution may be made up to $110,000.
  For married taxpayers, the income limits are
  $190,000 to $220,000. Example: a partial
  contribution of $1,000 can be made in 2008 by
  married taxpayers with an adjusted gross income
  of $205,000.
• Contributions to an Education IRA are not tax
  deductible but amounts deposited in the account
  grow tax-free until withdrawn.
               Education IRAs
   (Coverdell Education Savings Accounts)
• Withdrawals used to pay for the qualified higher
  education expenses of the beneficiary are not taxed.
• Contributions cannot be made after the beneficiary
  reaches age 18.
• Any assets remaining in an Education IRA after
  education expenses have been paid can be
  withdrawn by the beneficiary by age 30, but will be
  taxed as income.
• However, Education IRA assets may be transferred
  without penalty to another beneficiary who is a
  member of the family and under age 30.

								
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