If you’ve ever considered working for yourself, you may have wondered what type of business entity is best for the kind of work you do. Freelancers and consultants often choose to file a sole proprietor application when they know they’ll be working alone, and exclusively for themselves.
Let’s review what a sole proprietor is in more detail, so you can determine if it’s the best type of entity for what you intend to do.
Defining Sole Proprietor
A sole proprietor is the most common entity chosen to start a business. These entities are unincorporated, and therefore, there’s very little distinction between the business and you, the owner of the business.
As the owner of the business, you’re entitled to all the profits, and responsible for any loses, debts, or liabilities.
The advantages of filing a sole proprietor application include low start-up costs, easy tax preparation, and total control over the business.
The disadvantages of filing a sole proprietor include indefinite personal liability, which means if the business is ever sued, your house, savings, and other personal assets could be at risk.
Common jobs that are often performed as sole proprietorships include:
Filing a Sole Proprietor Application
You may already be working as a sole proprietor. However, the legal name of the business is your own name, unless you register a different business name. In most states, if you wish to operate a business that differs from your name, you’ll need to file what’s called a DBA.
DBA application filing is used by state agencies to identify individuals doing business as (DBA) a fictitious name, trade name, or any name that differs from his/her given name.
Sole proprietors must also heed any local or state permits/licenses required to legally operate the business. Regulations may vary from state to state. Information regarding these regulations can likely be found on the local county clerk’s website.
It’s not as complicated as it sounds. Once you get started, you’ll be happy knowing that you’re legally able to work toward your own goals.
There are many hoops you have to jump through when you want to start a corporation or LLC. Those obstacles are virtually non-existent when you want to form a sole proprietorship. Most of the time, you will simply need to declare your objective. You need to file locally and pay a small tax. After you go through this process, you will receive a business license and tax registration certificate.
Treatment of Sole Proprietorships for Tax Purposes
Sole proprietorships receive different treatment from the Internal Revenue Service than corporations. They do not receive separate treatment, so any money you receive from the proprietorship gets treated as personal income. All income you receive gets taxed the year in which you received it.
Essential Tax Forms for Sole Proprietorships
Although a sole proprietorship does not require registration with the state, it does require several different tax forms than what you need for other types of businesses. For your income tax, you will need to fill out a 1040 and Schedule C-EZ or Schedule C. The 1040 is also needed for self-employment tax in addition to Schedule SE.
A 1040-ES form is necessary for estimated tax, and for depositing employment taxes, you will need to deposit them electronically. A 941 form is needed for your Medicare and Social Security taxes, but farm employees will need a 943 form. Finally, a 940 form is required for your federal unemployment tax.
Need for an Attorney
Although a lawyer can certainly help with filing for a sole proprietorship, you may not need to hire one for your specific situation. An attorney can provide you with additional information about whether this type of business is best for you. An LLC or partnership may be recommended. A lawyer can also provide you with insight about the liabilities you may face with this kind of business and recommend ways to circumvent them.
It’s not as complicated as it sounds. Once you get started, you’ll be happy knowing that you’re legally able to work toward your own goals. Start the process of obtaining your EIN by going here.