What is a Sole Proprietorship?
Since side hustling/independent contract work is becoming more common, many people want to know how to make their way of making passive income into something more professional. Going the small business route by starting an LLC corporation might be the way to go but many people opt to start a sole proprietorship. This is a way to slowly dip your toe into the pool of entrepreneurship.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business that has only one owner who pays personal income tax on the profits from the business. Sole proprietorships are normally small side businesses before becoming a bigger business. You are only considered a sole proprietor if you start a business with another person. You would then be a general partnership instead.
Even though it is called a sole proprietorship this doesn’t mean that you won’t be able to hire employees. The only way you can stay a proprietor while having employees is if the employees have EINs (Employee Identification Numbers). These are the easiest kind of businesses to start because it is very straightforward. As a sole proprietor, you get all of the profits and you take all of the losses.
Most small businesses start as sole proprietorships and stay that way or expand into limited liability companies (LLCs). Sole proprietorships are not LLCs. A sole proprietorship is considered one and the same as the owner which is not what an LLC is considered. LLCs are a separate legal entity from the owner.
How does a sole proprietorship work?
In many states, you aren’t required to create a business entity for your trucking company, but if you don’t then the state automatically considers you a sole proprietorship. There is no required paperwork when you start a sole proprietorship. You can start immediately. So if you start freelancing you and your business will be one and the same. This means that you will need to file taxes as a sole proprietor. You may convert an LLC if your business starts to grow but it is not normally needed if you keep your business as a side hustle. It is just more work to make it an LLC because of the long paperwork and fees.
What are the advantages of a sole proprietorship?
You have official authority to make all of the decisions. You are in charge and call all of the shots.
There are no official legal formations or requirements so it’s quick and simple to get your sole proprietorship off the ground.
The pass-through tax is one of the main benefits of a sole proprietorship. The business is only subject to a single layer of income tax and, in some cases may be eligible for a 20% tax deduction.
The tax process is simpler because you also do not need to fill out a bunch of paperwork such as a license or permit registered to your state. This allows your business to grow faster.
You don’t need to use an employer identification number (EIN) from the IRS. You can just use your Social Security number to pay taxes.
Also, you don’t need a business checking account because you can do all of your finances through your own personal checking account.
It’s easy to change your sole proprietorship into an LLC once you start making money.
What are the disadvantages of a sole proprietorship?
Since there isn’t a difference between you and your business from a legal standpoint, all liabilities, debts, and legal issues go on you.
As a sole proprietor, you are considered self-employed. This means that you would need to make self-employment taxes during the year.
It is also more difficult to obtain equity from large investors or qualify for bank loans or lines of credit for your company.
If one of the truck drivers gets in an accident, your liability is connected to your assets. This means that the trucker that could have gotten into an accident could force legal action onto you because you and your company are one in the same.
If the company is found to be negligent and required to pay for damages, your personal assets are put on the line. Such as your house, and any other things that you own.
Being a sole proprietor, you would not have liability protection so someone could seize your personal assets.
Examples of a sole proprietorship:
Sole proprietorships are a good way for people to turn their small business into something a little more serious and permanent. There are a lot of jobs that can be considered sole proprietorships. Here are some common ones.
Trucking Company: Having a small fleet of trucks. Normally you would be starting out with a few trucks doing a few loads before it turns into a bigger business. You could also start as a independent contract worker and you would be considered a sole proprietorship.
How to start a sole proprietorship:
A good idea is to first choose a company name. There are some business regulations that apply to you. You may need to get a permit or a license for your state. If you plan on hiring employees, you will need EIN for the IRS. You’ll also need to register for a license for sales tax if you are going to sell taxable products.
Bottom line:
Considering the disadvantages of starting a sole proprietorship for your trucking company, a sole proprietorship wouldn’t be the best way to go. There are too many risks that you would be taking. If your employees get into accidents on the road, your assets might be at risk. Starting a sole proprietorship would be an easy start but, if you turn your company into an LLC you would be more protected. Yes, it would cost more money and take more time, but it would save you many future headaches.
Before working at Superior Trucking Payroll Service she worked in IT at GVSU which gave her the skills to problem-solve with customers over the phone.
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