This article describes a sole proprietorship business and discusses the major facts you need to know for starting this type of business.
What Is a Sole Proprietorship?
A sole proprietorship is a one-person business. It’s the simplest form of business to operate because you don’t need to register it with a state or have a board of directors or complex legal documents. Some examples of sole proprietors are freelancers, independent contractors, and gig workers, such as Uber and Lyft drivers. A sole proprietorship is also a tax entity, and the IRS considers your business income as part of your personal tax return.
Income and Expenses for Sole Proprietorships
As a sole proprietor, you’ll want to keep track of your sources of income for tax purposes. Your payments can come:
Directly from individuals From other businesses, which will send you a 1099-NEC form for non-employee compensation From sales of products or services
You will have different types of expenses, depending on your business type. Some expenses every business has include:
Advertising and marketingFees for advisors such as accountants and attorneysA place to operate from, such as a home office, retail space, or professional officeSupplies and office expensesTaxes, licenses, and permits for your business typeInsurance, including general business liability and professional liability insurance
If you are selling products, you can deduct the cost of those products, called cost of goods sold. There is a special calculation on your business tax form for this cost.
Steps in Starting a Sole Proprietorship
A sole proprietorship is the easiest form of business to start. All a sole proprietor business owner needs for a startup is:
A business name and address A business bank account Customers
You don’t need to register your business with your state, but you may need to take care of some other legal matters.
Business License
Depending on your business type, you may need to get a business license with your locality. If you run a freelance writing business from your home, you may need a general business license, or no license at all. But if you’re an attorney, you’ll need to get a license to practice from your state. And a food business will need a health permit. If your business name is different from your personal name, you will need a fictitious name permit (sometimes called “Doing Business As” or “DBA”) from your locality. For example, if your name is Pat Patterson and your business name is something like “Cars R Us” that doesn’t include your name, you will need a fictitious name statement saying you’re doing business as Cars R Us.
Sales Tax Permits
Apply to your state for sales tax permits if you are selling taxable goods or services.
Paying Income Taxes on Your Business Income
A sole proprietorship pays income taxes by completing a Schedule C and including this income on the owner’s personal tax return. Schedule C lists all the income of your business and all of the business expenses you want to deduct, with sections for home business and business driving expenses. The total net income from Schedule C then is entered on your Form 1040, along with income from other sources.
Self-Employment Tax
Everyone who works in the U.S. must pay Social Security and Medicare taxes. A sole proprietor pays this tax as self-employment tax based on the net income of their business. First, you prepare Schedule C to get the net income from your sole proprietorship. You then calculate self-employment tax on this amount. You will add these amounts to your income tax and most likely pay them in your estimated quarterly taxes.
Start Paying Other Taxes
Sole proprietorship businesses must pay taxes in the same manner as other businesses. All of these taxes must be reported and paid at specific times and amounts. In addition to income tax, your business must:
Collect and pay sales taxes on taxable goods and services your business sells Pay property tax on any real property (land and buildings) you own, such as an office or warehouse Collect, report, and pay employment taxes if your sole proprietorship has employees
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