Part I: Sole Proprietorship

“You are the business”

Are you a marketing consultant? Maybe you’re a freelance writer and you dabble in design as well. You’re probably best suited incorporating as a Sole Proprietorship.

This is the simplest corporate structure; the company is started in your name, you have no employees and there is no distinction between the business and you – the owner. Simply put, you are entitled to all of the profits (yay!) and responsible for the all the taxes and debts (bleh).

In terms of actually forming it, there is no formal filing to get started. So CONGRATS you’re more than half way there. For example, if you are a freelance photographer, then you are the sole proprietor of your sole proprietorship. Having said that, you still must obtain relevant licenses and permits, which vary by state and municipality. Here is an official list from the U.S. Small Business Administration to get you started on those annoying permits.

Finally, if you want your business to have a name other than your own, file a DBA. This puts a facade on your personal business and can really get you looking professional by giving your business a name.

The taxes is where it gets a bit tricky. We recommend hiring a professional to help you with this, but just in case, here are some quick hits. As a sole proprietorship you will need to:

  • Report your income, expenses and/or losses through the IRA filing called Schedule C and the standard 1040 Form.
  • From your Schedule C, you carry your bottom line, or your personal business’ profits, to your personal tax returns.
  • You are then responsible to withhold, and pay all relevant income taxes, which include self-employment and estimated taxes. As you can see, a sole proprietorship business is very risk with respect to taxes and liability (lawsuits).

Thanks for reading and all you freelancers should not be afraid to reach out to me if you’re looking for some help. My personal email is ceo@nomadfinancial.com and I’ll be happy to answer any questions.

If you don’t want to talk to me, and just want relevant updates, follow me on twitter.

If Sole Proprietorship isn’t the right structure for your startup, check out Partnership.

One response to “Part I: Sole Proprietorship”

  1. True that a Sole Proprietorship results is some simplicity. Unfortunately, the IRS tends to scrutinize deductions taken by a sole proprietorship as there have been many abuses in the past. Even small operations are audited by the IRS. If you use this structure, be super careful to maintain all support for expenses. Read the IRS publications: http://www.irs.gov/pub/irs-pdf/p535.pdf and especially the more stringent requirements of expenses that can also be partly personal in nature: http://www.irs.gov/pub/irs-pdf/p463.pdf.

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