Food for thought for the would-be entrepreneur (part 4 in a series)
Simply stated, a sole proprietor is a person who is “doing something” with the intent of making money. All it takes to be a sole proprietor is for somebody to pay you for your efforts.
This means most babysitters are sole proprietors. Other examples include a granny who takes in ironing, a housewife selling cosmetics from a catalog, a 12 year-old with a snow shovel (or leaf rake) going door-to-door, the youngster with a lemonade stand, and anyone selling on Ebay (or the equivalent.) Granny might be trying to earn enough to keep the lights on while junior just wants to buy comic books, but they each have what the IRS calls “a profit motive” – that is, they each want “to make money.”
But wait! Before our system got so complicated and people worried so much about liability, pretty much every business that wasn’t a giant corporation was a sole proprietorship. Doctors, lawyers, accountants, barbers, farmers, shop keepers… And they still can be, today.
Some jurisdictions require that sole proprietors register, which could come with fees. This is generally accomplished at the local or county level rather than the state level. There could also be zoning restrictions if you work out of your home.
Being a sole proprietor means you are the one-and-only owner and boss. You are also the one-and-only responsible party and all profits are yours. Think of it as having yet another pocket built into your pants.
All problems are yours, too! As a sole proprietor, the business is considered an extension of your personal person. Suing the business is the same as suing you personally: either way, both personal assets and business assets are at risk. A recommendation: get insurance!
You will file annual taxes on Schedule C, which is a sub-form of the IRS individual 1040. At the federal level, you will be subject to self-employment tax in addition to regular income tax. At the state level, you will just be subject to income tax. The IRS has a term for this: Disregarded Entity. This sounds terrible, but it only means that for tax purposes, the business is not a separate entity with its own stand-alone tax form.
Yes, you can have employees. To have employees, you would need a Federal Employer Identification Number (FEIN.) You would also need to register at the state level in order to remit your employment taxes to the state.
Yes, you can sell products/services that are subject to sales tax. You will need to register at the state level. Some states allow you to use your SSN, but others require you to obtain an FEIN. (The FEIN is not used strictly for employment taxes.) Be careful! Some states actually make you pay for a license to collect sales tax. I think this is very weird, but it probably allows the state to fine you more if you don’t get that precious license in advance.
Yes, there could be other state/local taxes, depending on your industry and your geography, and the same registration procedures would be necessary.
This is the easiest form of business to start, but as you can see, you definitely need to call your local and county governments to find out non-state-level rules.