The Skinny on Sole Proprietorships

Let’s get one thing straight right away: Whether it’s a sideline gig or a full-time consulting concern, if you’re providing goods or services in exchange for payment, you are running a business. If you started the enterprise yourself–no matter what the reason, or whether you operate from a corner of your bedroom–that makes you an entrepreneur. While you giggle or shake your head at being lumped in with the likes of Oprah Winfrey and Bill Gates, start getting used to the idea that you’re part of a business revolution. The U.S. Census estimates that 10.4 million people are self-employed. That’s more than a micro-trend; it’s an economic force to be reckoned with.  However, many individuals, especially in this last year of mass layoffs, have put off doing the paperwork required to become a full-fledged enterprise in favor of waiting to “get a real job.” In the meantime, patching together project work or pursuing a passion there just wasn’t time for while “working for the man” is generating income. Once that begins, no matter how much is on the balance sheet, the IRS can come knocking. So it’s best to make things legit.

Sole Proprietor Startup 101
A sole proprietorship is a business structure owned by one person (and sometimes his or her spouse) that isn’t registered with the state as a corporation or a limited liability company (LLC). Says Jason Deshayes, an Albuquerque-based CPA, “Sole proprietorships are easy to set up and require very little legal work, outside of a business license.”

Registering your business to comply with any license or permit laws can be as simple as calling your local City Hall and asking how to obtain a business license .  It will cost you, and the rates vary based on your municipality’s schedule. Once you register, you’ll get a Tax ID number. That’s helpful for client invoicing–so you don’t have to sling your Social Security number around.

Take Care of the Tax Man
Once you’ve got your license, turn your thoughts to bookkeeping. Kristen Fischer, author of Creatively Self-Employed, says engaging an accountant at this early stage of the game can put you on the road to setting up organized systems to track income and expenses.

“Even if you don’t use an accountant in the future, spend the extra money [upfront] and use that person as a resource. Find out what you can deduct and depreciate.”  Scott Estill, author of Tax This! An Insider’s Guide to Standing Up to the IRS, points out that the U.S. tax code offers numerous deductions for small businesses, such as expenses related to a home office, travel, meals, entertainment, computers, cell phones, and other business items. “The only requirement to qualify as a business is to have a profit motive (as opposed to a hobby, in which profit is not a primary consideration). Estill also notes that a sole proprietor is not required to make any estimated quarterly tax payments until an actual net profit is earned.

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