How do I form a sole proprietorship?

Question

Is forming a sole proprietorship a good idea? Do I have to pay a lot more on taxes? How do I apply with the IRS to have a sole proprietorship?

Answer 1

A sole proprietorship is nothing more than you as the sole owner of your business. You do not need to do anything unless you want to conduct business under a different name than your own, or if you will have employees. To conduct business under a different name, just register it with the state you live in for a small fee. If you will have employees, you need to get an Employer Identification Number (EIN) from the IRS. There is no charge for this. If you won't have employees, you do not have to register with the IRS.

Any profits or losses go on Schedule C of your individual tax return. Your tax rate will be the same as if you were an employee making the same amount of money, but you will have to pay your own Social Security and Medicare taxes (15.3% instead of 7.65% because you pay both the employer and employee portion).

The biggest disadvantage of a sole proprietorship is that you are personally responsible for any and all debts of the business, including any lawsuits that may happen. Your personal assets can be taken to pay those debts if needed. The advantage is that it is very simple to form (just start doing business), and your personal tax rate may be lower than a corporate tax rate.

Answer 2

Brian had a very good answer. Sole proprietorship is the default ownership unless you've incorporated.

You wouldn't want to set up a C Corp, as your money is taxed twice (think big corporations with stock etc...). A C Corp often has a lower corporate tax rate, but you pay that on top of paying normal income taxes on the money you pay yourself. It's overkill to start most small businesses as a C Corp, and probably not a good idea.

But, creating a limited liability corporation (LLC) or S Corp can give you the corporate veil you want to protect your personal assets in case you get sued or lose everything in the business, as they can only collect from the corporation's assets. Both types of corps will have the net income flow through your personal tax return. You file some extra schedules, but pay taxes on the money through your normal 1040's.

You should probably consult a CPA or other tax advisor, as well as an attorney to help create the corporation documents. It can probably be done yourself if you can find the right forms, but getting good advice and assistance would probably be worth the money.

Answer 3

You do not have to do anything to form a sole proprietorship.

In some ways they are good, some not so good. It depends a lot on the industry that you are going to be working in.