All things Sole Proprietor and Partnerships

Imagine: you have surpassed gifting your homemade jewelry to friends and family and have bravely decided to take your talents to Etsy. As an individual starting your own business, there are many considerations to take into account — the first being the opportunity to register your business under a specific entity, such as a Corporation or Limited Liability Company (LLC). Reasons you may consider one of these entity types depend on your preferences regarding taxation, legal protection and control of the business. (More on entity types here). If you opt out of incorporating or registering as an LLC, then your business is a Sole Proprietorship.

A “Sole Proprietorship” may sound complicated, but it’s nothing more than jargon for an individual who owns a business and is personally and solely liable for its debts. Running your jewelry business may require buying materials, maintaining and promoting your Etsy shop, and eventually hiring an employee or two to manage orders. As a Sole Proprietor, you are personally responsible for these costs, as well as any debts incurred while operating your business.  

Other cornerstones of a Sole Proprietorship

  1. Sole Proprietorships are easy to set up and can cost significantly less to maintain than other entity types. Other than an EIN/Tax ID, Sole Proprietorships don’t require additional formation by the state or IRS.
  2. Sole Proprietors tend to run small or part-time businesses and typically have few or no employees.
  3. As a Sole Proprietor, you are 100 percent liable for any and all business debts. If the business goes south, you open yourself up to lawsuits that, if won, will jeopardize your personal assets. For example, if someone sues your business and wins, they can go after your home.  
  4. A Sole Proprietorship is recognized as a legal entity and but is legally and financially indistinguishable from its owner. This means you must report the net profits or losses of your business on your personal income taxes (known as “pass-through taxation”). In addition, you are required to pay a self-employment tax of 15.3 percent to the federal government.
  5. However, Sole Proprietorships offer unmatched flexibility. You have unlimited control over your business, its proceeds and its resources.

It’s important to note that a Sole Proprietorship is owned by one person and one person only. Unlike other entity types, Sole Proprietorships cease to exist when the business owner dies, retires or decides to sell the business. If and when a Sole Proprietor offers partial ownership to another business or person, the company will no longer be treated as a Sole Proprietorship but as a Partnership.

General Partnership

If you share ownership of your business with at least one other person, you are considered a General Partnership. Similar to a Sole Proprietorship, a General Partnership also offers pass-through tax liability, low cost of formation and flexibility, but all members of a General Partnership remain personally liable for the debts and obligations of the business.

The 411 on EIN

Regardless of your entity type, you will need a unique number — known as an Employer Identification Number (EIN) or Tax ID — to identify your business to the government and the IRS. In some cases, you are able to use your Social Security Number (SSN) to identify your Sole Proprietorship; however, if you plan to hire employees, establish payroll, open a bank account in your company’s name or acquire credit, you will need an EIN/Tax ID. Even if you don’t need one today, there’s no harm in applying for an EIN and having it available should you need to do any of the aforementioned tasks. It also comes in handy when trying to conceal your personal SSN on invoices and other business forms.

Note: Individuals are only allowed one Sole Proprietor EIN/Tax ID in their lifetime. If you applied for/received a Tax ID but no longer need it or would like to get a different EIN for another purpose, you will need to cancel the original EIN with the IRS.

What’s in a name?

As a Sole Proprietor, the legal name of your business is your name — exactly the way you listed it on your Tax ID application. The legal name of a Partnership is the name provided by the owner(s) for state filings. You have the option of filing for a fictitious trade name or a DBA (“Doing Business As”), which allows you to choose a different business name you wish to be recognized by. It can even be required for business bank accounts opened for Partnerships if you want all partners to have access to the account. Whichever name you choose, you will need to file the appropriate forms with the county in which you are conducting business.

If you’re still unsure whether or not your business qualifies as a Sole Proprietorship, Partnership or something else, take our quick survey to determine your entity type.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.


Navigating credit card payment processing

For a majority of Americans, the days of carrying wads of cash or writing out a check to pay for purchases are long gone. Even debit cards are taking a back seat to the credit card due to the endless variety of points, bonuses and travel incentives it offers users.

We are far from becoming a cashless society, but if your business doesn’t accept payment via credit cards, you’re missing out on a lucrative opportunity to increase both the volume and sum of your sales. In general, customers are more likely to make a purchase — and spend more on that purchase — when they’re able to pay with a credit card.

You may be wondering, why doesn’t every business accept credit cards? The answer is that by doing so, the business owner must fork over a percentage of each purchase to middlemen, which typically consist of a payment card company that processes the transaction, a credit card association (ex. Visa, MasterCard, etc.) and a credit card issuer (i.e. the bank that issued the card). For some small businesses, especially those that sell a high volume of lower-priced items, these ‘convenience’ fees can add up quickly and cut in to their profit margins.

While processing fees for credit cards are unavoidable, merchants can keep these costs low by choosing the right pricing model for their business and negotiating better rates based on volume of transactions. Below is a breakdown of the four most common pricing models for credit card processing. (Note: While reading, keep in mind that many markup fees are negotiable, while wholesale fees are not.)

  1. Interchange Plus

Interchange Plus is the most common pricing model — and the most transparent. The “Interchange” portion of this model refers to a wholesale fee charged by the credit card association (Visa, Discover, etc.) for every wholesale purchase. These fees are set up by each credit card association as a fixed rate; generally, the greater the rewards of the credit card, the higher the fixed rate will be. This is because the credit card association has to pay for the rewards earned by card members. It’s also the reason why businesses often refuse to accept a specific credit card — because it’s simply too expensive and not worth the ROI for the business owner.

The “Plus” portion of this pricing model refers to the credit card processor’s markup (either a percentage of per-transaction fee) that is applied to each credit card transaction. The true cost will depend on the markups, but Interchange Plus typically offers substantial savings compared to other pricing models. Additionally, wholesale fees and markups are itemized and listed on your monthly statement, so you know exactly what you’re paying for.

  1. Subscription

With a subscription-based pricing model, the credit card processing company charges a small fixed cost for each transaction, rather than a percentage of sales volume (as in the Interchange Plus model). In addition, the business owner will pay a flat monthly subscription fee in order to take advantage of the fixed-cost perk.

This model is the only pricing structure where a processor’s markup is not based on a percentage of sales, making it a great option for companies with large ticket items. Because the subscription fee is separate from the per-transaction fee, this structure also offers a good deal of transparency for the business owner. It’s important to note that many of these membership models cap the number of transactions that can be processed at each membership level; if you process more than that amount, the price of your monthly membership may increase.

  1. Tiered

Tiered or “bundled” pricing plans categorize each credit card transaction into one of three categories — qualified, mid-qualified or non-qualified. Credit card processors will charge a different fee for each transaction based on which category it falls within. Fees are the lowest for qualified purchases and increase for mid-qualified and non-qualified transactions.

What makes a purchase qualified versus mid- or non-qualified is the type of credit card used to make the transaction. Factors such as the brand of the credit card, whether it’s a private or business card and the types of rewards it offers play a role in which tier the transaction falls in to.

This option — while currently the most common pricing model — can be inconsistent, nontransparent and expensive. Processors don’t often disclose which tiers transactions are falling into, concealing the real cost. The amount of money paid in fees by a business owner can vary greatly each month, depending on the type of sales completed during that timeframe. Additionally, business owners don’t get to decide which credit cards their customers use, so they have no choice but to pay a greater fee every time a customer pays with a card that does not fall into the qualified tier.

  1. Flat Rate

The flat rate pricing model is similar to tiered pricing — but without the tiers. All transactions incur the same blended fee, somewhere around three percent, regardless of the cost of the purchase. Some processors also charge a small per-transaction fee, but most of the cost comes from the blended fee, which is typically more expensive than other models. However, most processors (especially PayPal, Venmo, Stripe, Square, etc.) do not charge a monthly fee. Flat rate pricing may be right for low-volume or low-ticket businesses, or if a majority of your customer base takes advantage of or is willing to use a service like PayPal or Venmo. By working with these processors, you can get approved online and take credit within about 10-15 minutes.

To accept or not to accept…

The credit card industry has changed over time; today there is more transparency, and merchants are getting smarter about their options. We recommend educating yourself on different rates/pricing models and understanding how many transactions your business is recording per month to decide which option is best for you.

Allowing customers to pay with credit cards can increase your sales by up to 23 percent. If you choose to take advantage of this option for your business, our payment processing solutions partner CardConnect can assist in getting you set up with free terminals, low fixed rates and mobile device plug-ins.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.


Is an LLC right for me?

Find Out Why an LLC is The Most Popular Business Entity

One of the most important decisions you will make as a new business owner is the legal structure of your business. This structure – also known as an entity – determines the income tax return form you will file each year, ultimately affecting the earnings, overall profitability and success of your business. From Partnerships to Corporations to Limited Liability Companies, each entity has its own advantages and limitations.

A Limited Liability Company, usually referred to as an “LLC,” is one of the most common entity types, due to its flexible business structure and ability to protect personal assets of the business owner. It may seem like common sense to choose a structure that promises “limited liability.” After all, who wants more liability? The decision has far-reaching effects, so you want to make sure you research and consider the benefits and limitations for your individual business needs.   

The ABCs of LLCs

There are several cornerstones of LLCs that are important to understand to determine whether or not the structure makes sense for your business.

Benefits

  • Protected assets: LLCs provide limited liability protection to their owners, who are generally not personally in charge of company debts and obligations. This means lenders cannot pursue the personal assets of the owners – such as homes, savings accounts or property – in the case of outstanding business debts or lawsuit settlements. In contrast, general Partnerships and Sole Proprietorships allow personal assets to be exposed, as the company and owners are legally considered the same. Simply put, an LLC separates and provides a layer of protection between yourself/your personal assets and your business, its assets and liability.
  • Pass-through tax: One of the biggest advantages of the LLC structure is its flexibility in filing taxes. LLCs, by default, are a “pass-through” taxation entity, which means any taxes on the income from your business are reported and  calculated on your personal income tax return (and those of any other owners/members). LLC owners are only taxed once, at the personal level, unless members elect to be taxed as a Corporation. If it is a multi-member LLC, then the default taxation is of a Partnership, which also passes through the taxable income from the LLC to the personal tax returns of the multiple owners.
  • Flexibility to choose how the LLC is taxed: Limited Liability Companies can elect to be taxed as an S-Corporation or a C-Corporation, instead of a pass-through LLC. This means that you, as an owner, are taxed on your personal return for the income of the business, and the business is taxed.
  • Fewer restrictions and requirements: There are very few limitations on who can become an LLC owner or how many owners an LLC may have, unlike S-corporations. LLCs also face fewer yearly and ongoing state-enforced demands. An added bonus? Less paperwork.
  • Flexible management arrangement: LLCs are free to establish any organizational structure agreed upon by the business owners. They can be managed by the owner(s) or by supervisors, unlike Corporations, which have a board of directors who oversee the important business decisions of the firm and officers who manage day-to-day issues.

Limitations

  • Self-employment taxes: One benefit of an LLC is the ability to be taxed on a personal level, rather than as a corporation. However, because LLC members are considered self-employed business owners rather than employees, they are not subject to tax withholding. Instead, each LLC member is responsible for estimating and setting aside enough money to pay taxes on their share of profits. Without proper planning, this can result in forking over a big unexpected check to the IRS during tax time.
  • Limited life: Most of the time, LLCs do not live on beyond their founding or “managing” members; the LLC must dissolve upon their death, bankruptcy, retirement, resignation, expulsion or dissolution. This lack of perpetuity can be a factor that causes new business owners to form instead as a Corporation, for example.
  • Lack of structure: Some business owners thrive when given freedom to manage a company as they see fit. Others may find this flexibility overwhelming and prefer more direction, structure and clarity of roles – from a board of directors of a Corporation, for example.
  • Annual franchise tax: Maintaining an LLC costs can average up to $800 per year depending on which state you filed your articles of organization with. While this can be seen as a drawback, the benefits of the LLC structure typically outweigh this cost as long as the company becomes profitable.

Many businesses benefit from forming an LLC, but it’s not right for every company. Because of the simplicity and flexibility, it is a very common option for many companies. Once you decide to start an LLC, the first thing you will need to do is get an EIN/Tax ID Number, or Federal Tax ID Number, for your LLC. You can file for your EIN/Tax ID using this link: https://app.govdocfiling.com/LLC.

If you’re still unsure of which entity type to choose, you can take a short survey to help decide here: https://www.govdocfiling.com/survey/. If you would like the advice of a small business lawyer or accountant on your specific needs, you can fill out this form, and GovDocFiling will coordinate a consultation.

Our philosophy is to help you get things done correctly the first time to avoid expensive issues down the road. No matter what kind of company you’re starting, GovDocFiling will walk you through the steps for selecting an entity, obtaining your Tax ID and getting your business off the ground.

 

About the author

From selling flowers door-to-door at hair salons when he was 16 to starting his own auto detailing business, Brett Shapiro has had an entrepreneurial spirit since he was young. After earning a Bachelor of Arts degree in Global and International Studies from the University of California, Santa Barbara, and years traveling the world planning and executing cause marketing events, Brett decided to test out his entrepreneurial chops with his own medical supply distribution company.

During the formation of this business, Brett made a handful of simple, avoidable mistakes due to lack of experience and guidance. It was then that Brett realized there was a real, consistent need for a company to support businesses as they start, build and grow. He set his sights on creating Easy Doc Filing — an honest, transparent and simple resource center that takes care of the mundane, yet critical, formation documentation. Brett continues to lead Easy Doc Filing in developing services and partnerships that support and encourage entrepreneurship across all industries.