Sole Proprietor Business
CLICK HERE to register your sole proprietor business.
A sole proprietorship is a one-person business that, unlike corporations and limited liability companies (LLCs), doesn't even have to be registered with the state in order to exist. There were more than 22.6 million sole proprietorships in the U.S. in 2008, according to the Internal Revenue Service (IRS). And even though this type of business is easy to set up, it's also easy to ignore local registration requirements, business licenses, and paying taxes on your income.
"It's by far the most common type of business, the easiest to set up, and the one that most businesses end up starting as," says Jerry Osteryoung, director of outreach at the Jim Moran Institute at Florida State University's College of Business. "You can always migrate up to an LLC or a corporation, but when first starting a business you need to make sure it's easy to start."
To be a sole proprietorship, you do not have to take any formal or legal
steps at the federal, state, or local level.
As a sole proprietor you must file an annual return with the IRS to report your
business income and expenses; use Schedule C (or, if eligible, a simplified Schedule C-EZ),
which is part of Form 1040. If you do not have employees, then the business can operate
under your Social Security number. However, once you hire staff or set up
a retirement plan, you'll need a federal employer identification number (EIN), which you
can obtain online at no cost from the IRS.
"If the business is profitable, you will owe self-employment taxes," Weltman says. "These taxes cover the employer and employee share of Social Security and Medicare taxes."
Because you are self-employed, you do not have withholding from a paycheck to cover your tax obligations. Instead, you pay income and self-employment taxes through quarterly estimated tax payments (you should set aside money on a regular basis to cover these payments).