Don't overlook these!
Updated for 2012
What Is a Sole Proprietorship?
A sole proprietorship is an unincorporated business, owned by one person.
From a legal standpoint, the owner and the business are considered one and the same.
The implication of this is that both your business and personal assets are at risk should you be sued.
In contrast, a corporation and its owners (stockholders) are separate legal entities.
Stockholders enjoy limited liability, which means, their personal assets are insulated from the legal claims of the corporation's business creditors.
Unlike a corporation, limited liability company, or partnership, where there is some formality involved in setting up these business structures, a sole proprietorship doesn't involve any formality.
Hang out your shingle, hand out your business cards, and viola, you're in business!
When you open a business bank account the bank will generally need a business license or sales tax license to set up your account.
There are no IRS licensing requirements for sole proprietorships.
However, for state and local purposes, you may need a business license. If you sell merchandise at retail you'll need a state/local sales tax permit.
If you use a fictitious business name, for example, Jack Plummer doing business as (dba) Sludge Plumbing Service, you'll need to register it.
Check with your state, county, and local tax agencies.
When does a sole proprietor need a Federal Employer Identification Number (EIN)?
If any one of the following apply, a federal employer identification number is required:
If none of the above apply, you can use your social security number for tax reporting.
TIP: With the rise of identity theft, consider applying for a federal employer identification number even if you're not required to get one. Here's why: Should you hire an independent contractor and have to issue Form 1099-MISC, you'll enter your federal employer identification number on this form instead of your social security number.
If you have employees, you'll also need a State Withholding Number, for income tax withholding, and a State Account Number, for state unemployment tax reporting.
Certain states have no personal income tax (e.g., Nevada, Texas, Florida). Check with your state to see what tax identification numbers they may require.
Withdrawals of cash or property out of your sole proprietorship for your own personal use are called draws.
A draw represents a reduction of business capital; it is not a deductible business expense.
You should set up a Drawings account in your books to keep track of your withdrawals.
Draws used for business purposes:
If you take cash out of your business and use it for business-related items, get receipts. You'll need them to support your deductions and to record the amount of the expenses in your books.
As the owner of a sole proprietorship you're not considered an employee of your own business.
This means you don't receive a paycheck or W-2 Form or have taxes withheld from your self-employment income.
Since no taxes are withheld from your self-employment income, you'll need to make quarterly estimated tax payments (Form 1040-ES) to cover both federal income taxes and self-employment taxes.
If you're married and you and your spouse jointly own an unincorporated business and share in the profits and losses, you're both partners in a partnership.
However there is an exception which permits a husband and wife to be co-sole proprietors (covered next.)
If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business as either a sole proprietorship or a partnership, whichever you choose.
Sole proprietors generally report business income and expenses on Schedule C (or C-EZ if eligible).
You file Schedule C annually and attach it to Form 1040 (a farming sole proprietorship files Schedule F, Profit or Loss From Farming.)
If you operate multiple businesses set up as sole proprietorships, prepare a Schedule C for each business.
Combine net profits and net losses reported on each Schedule C.
Enter the total net amount on Form 1040, line 12, Business income or (loss).
For example, if you have three sole proprietorships, two having total net profits of $100,000 and one with a net loss of $10,000, you would report a net profit of $90,000 on Form 1040, line12 (line 17 for farming net income).
Only one Schedule SE, Self-Employment Tax is filed regardless of the number of Schedules Cs you must file.
For example, say you have three sole proprietorships. You would prepare three Schedule Cs but only one Schedule SE.
You combine the net profit and loss reported on each Schedule C and enter the net amount on Schedule SE to start the computation for self-employment tax.
If you end up with a net profit of less than $400, you're not required to file Schedule SE; you're not liable for self-employment tax.
Sole Proprietorships: Workers' Compensation Insurance
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