Sole Proprietorship for Dummies (What is a Sole Proprietorship and How Do I Start One?)

Summary

Charlie's video offers a comprehensive guide to sole proprietorships, the default business entity for new entrepreneurs. It covers the setup process, including choosing a business name, potential EIN registration, and tax obligations via Schedule C. Charlie discusses the advantages like minimal startup costs and direct control, and disadvantages such as personal liability and difficulty raising capital. The video also explores when it might be time to consider an LLC or S Corp for business growth and liability protection.

Takeaways

• 😀 A sole proprietorship is the default business entity you automatically become when you start making money from a business or side hustle without any formal registration.
• 💼 There's no legal requirement to register a sole proprietorship, but you can choose to get an Employer Identification Number (EIN) for tax purposes.
• 🏦 All profits from a sole proprietorship are considered personal income and are taxed as such, with no need to share profits with other owners or shareholders.
• 🛠️ Setting up a sole proprietorship involves choosing a business name, potentially registering it, and considering a DBA (Doing Business As) name if operating under a different name.
• 🌐 It's important for a sole proprietor to have a web presence, which often involves buying and registering a domain name and setting up a website.
• 📜 Business licenses may be necessary depending on the type of business and location, and an EIN is recommended if you have employees or plan to open a business bank account.
• 💼 Opening a separate business bank account is advisable to keep personal and business finances separate, which also helps in building business credit.
• 💼 Accounting systems like QuickBooks are essential for tracking income and expenses, making tax preparation easier and ensuring compliance with tax laws.
• 💰 Sole proprietors must pay income taxes on business profits, file using Schedule C of Form 1040, and may also be subject to self-employment taxes and other local or state taxes.
• ⚖️ A significant disadvantage of being a sole proprietor is personal liability, where personal assets can be at risk if the business faces legal issues or debts.
• 💹 The decision to switch from a sole proprietorship to an LLC or S Corp should be considered as the business grows, especially for liability protection and tax benefits.

Q & A

What is a sole proprietorship?

A sole proprietorship is an unincorporated business owned by one person. It is the default business entity that one is automatically assigned once they start making money from their business or side hustle, without requiring any federal registration.

How does taxation work for a sole proprietorship?

All profits from a sole proprietorship are taxed as personal income tax. This means that the income is 'passed through' to the owner's personal tax return, and there is no separate business tax entity.

What are the advantages of being a sole proprietor?

The advantages include minimal startup costs, direct control over the business, and tax benefits such as being able to deduct business-related expenses from personal income.

What are the potential disadvantages of operating as a sole proprietor?

Disadvantages include personal liability, where the owner's personal assets can be at risk if the business is sued, and difficulty raising capital since it's just one person's business.

What is an EIN and why might a sole proprietor need one?

An EIN (Employer Identification Number) is a number assigned by the IRS for tax purposes. A sole proprietor might need an EIN if they have employees, want to open a business bank account, or need to file certain tax forms.

Can a sole proprietor hire employees?

Yes, a sole proprietor can hire employees. However, having employees may indicate that the business has grown to a size where considering an LLC or S Corp might be beneficial.

What is the difference between a sole proprietorship and an LLC?

A sole proprietorship is a single-owner business with no legal separation between the owner and the business, whereas an LLC (Limited Liability Company) provides limited liability protection and can have multiple owners.

Why might a business owner switch from a sole proprietorship to an S Corp?

A business owner might switch to an S Corp to take advantage of tax benefits, such as avoiding double taxation and potentially saving on self-employment taxes if they make a significant profit from the business.

What is a Schedule C and how does it relate to a sole proprietorship?

A Schedule C is a form used to report income and expenses for a sole proprietorship. It is part of the owner's personal tax return (Form 1040) and is used to calculate the net profit or loss of the business.

What steps can a new business owner take to set up their sole proprietorship correctly?

A new business owner can set up their sole proprietorship by choosing a business name, potentially registering it with the state, buying and registering a domain name, considering business licenses, getting an EIN if necessary, opening a business bank account, setting up an accounting system, and filing taxes using Schedule C.

Outlines

00:00

🧑‍💼 Introduction to Sole Proprietorships

Charlie introduces the topic of sole proprietorships, explaining that it's the default business entity for new business owners and side hustlers. He outlines the video's agenda, which includes discussing the differences between various business entities, the steps to set up a sole proprietorship, and the pros and cons of choosing this business structure. Charlie emphasizes that no special paperwork is required to become a sole proprietor, and all profits are taxed as personal income.

05:00

📝 Setting Up Your Sole Proprietorship

The paragraph discusses the steps to set up a sole proprietorship, which includes choosing a business name, potentially registering it with the state, and checking for trademark availability. It also covers registering a DBA name, buying a domain name, and the option of getting an EIN. Charlie suggests creating a separate business bank account and using accounting software like QuickBooks. He also touches on the necessity of paying taxes, including income taxes, self-employment taxes, and possibly quarterly estimated payments, and the importance of record-keeping for tax purposes.

10:01

🔍 Pros and Cons of Sole Proprietorships

Charlie explores the advantages and disadvantages of operating as a sole proprietorship. On the positive side, he mentions minimal startup costs, tax benefits, and direct control over the business. However, he also highlights the significant downside of personal liability, which means personal assets can be at risk if the business is sued. He also points out the difficulty in raising capital as a sole proprietorship. Charlie then compares sole proprietorships to other business entities like partnerships, LLCs, and S Corps, suggesting that as businesses grow and profits increase, it may be more beneficial to switch to an LLC or S Corp for liability protection and tax savings.

Keywords

💡Sole Proprietorship

A sole proprietorship is an unincorporated business owned by one person. It is the default business entity that comes into existence as soon as an individual starts making money from a business or side hustle. In the video, Charlie explains that no special paperwork is required to form a sole proprietorship, and all profits are taxed as personal income.

💡EIN

EIN stands for Employer Identification Number, which is a unique nine-digit number assigned by the IRS to business entities for tax purposes. Although not required for a sole proprietorship, obtaining an EIN can help in opening a business bank account and filing taxes. Charlie mentions that while it's not mandatory for a sole proprietor without employees, it can be beneficial for business operations.

💡DBA

DBA, which stands for 'Doing Business As,' is a trade name that a business can register if it operates under a name different from the owner's legal name. Charlie suggests registering a DBA if the business name is significantly different from the owner's name, which helps formalize the business entity.

💡Domain Name

A domain name is the web address where a business's website can be found. Charlie emphasizes the importance of having a domain name that matches the business name for effective online marketing and brand recognition. He recommends registering a domain name as part of setting up a sole proprietorship.

💡Business Licenses

Business licenses are legal permits issued by governmental bodies allowing individuals or entities to conduct certain business activities. Charlie points out that while not always required for a sole proprietorship, obtaining the necessary licenses can be crucial for operating legally, especially for businesses that require specific permits or certifications.

💡Business Bank Account

A business bank account is a financial account designated for business transactions, separate from personal finances. Charlie recommends opening a business bank account to maintain a clear distinction between personal and business finances, which is essential for managing cash flow and tax reporting.

💡Accounting System

An accounting system is a set of procedures and tools used to track financial transactions and produce financial statements. Charlie suggests using an accounting system like QuickBooks to keep track of business income and expenses, which simplifies tax preparation and financial management for a sole proprietorship.

💡Schedule C

Schedule C is the form used by sole proprietors in the United States to report business income and expenses on their personal tax return. Charlie explains that all income and expenses of a sole proprietorship are reported on Schedule C, which is attached to Form 1040.

💡Personal Liability

Personal liability refers to the owner's responsibility for the debts and obligations of a business. Charlie discusses that with a sole proprietorship, there is no legal separation between the business and the owner, meaning the owner's personal assets can be at risk if the business faces lawsuits or debts.

💡LLC

LLC stands for Limited Liability Company, a business structure that provides its owners with limited liability and tax flexibility. Charlie mentions that an LLC might be a better choice than a sole proprietorship for businesses that require personal liability protection or are looking to grow and raise capital.

💡S Corp

An S Corporation is a corporation that has elected to be taxed as a partnership or sole proprietorship for federal income tax purposes. Charlie suggests that forming an S Corp might be advantageous for businesses with high net profits to reduce self-employment taxes.

Highlights

A sole proprietorship is the default business entity you automatically become when you start making money with a business or side hustle.

No federal registration is required for a sole proprietorship, though an EIN can be chosen for tax purposes.

All profits from a sole proprietorship are taxed as personal income tax, with no need to share with other shareholders.

Sole proprietorships can be any type of business, from independent contracting to brick and mortar stores.

As a sole proprietor, you have complete control over your business as the only CEO.

There is no need for special paperwork to start a sole proprietorship, and it's the default business type.

Choosing a business name and potentially registering it with the state is an important step for a sole proprietor.

Registering a DBA name is recommended if you are operating under a name different from your own.

A domain name and a website are essential for marketing and establishing an online presence for your business.

Business licenses may be required depending on the location and type of business, but an EIN is not necessary for all sole proprietors.

Opening a separate business bank account is advisable to keep personal and business finances distinct.

An accounting system is crucial for tracking income and expenses, with QuickBooks being a popular choice.

Sole proprietors must file a Schedule C on form 1040 for tax purposes, reporting all business income and expenses.

Business insurance may be necessary depending on the type of business and services provided.

Hiring employees can help grow your business faster by leveraging other people's time and skills.

Paying taxes as a sole proprietor includes income taxes, self-employment taxes, and possibly quarterly estimated payments.

The advantages of a sole proprietorship include minimal startup costs and direct control over the business.

Disadvantages include personal liability, difficulty raising capital, and potential limitations in business growth.

Consider transitioning to an LLC or S Corp for personal liability protection and tax benefits as the business grows.

Transcripts

hey guys it's Charlie here and in

today's video I'll be doing a complete

presentation about Sole proprietorships

and everything you need to know about

them so if you're a new business owner

you might be wondering what's the

difference between a sole partnership an

LLC S Corp C Corp all that stuff the

great news is that you can actually

start building your business right away

with a sole proprietorship this is the

default business entity that you are you

know automatically assigned right when

you start making money with whatever

business or side hustle you have there's

actually a lot of really important

things that you guys need to know we'll

go through all the different steps to

setting up and making sure that your

sole proprietor is you know handled

correctly we'll go through the pros and

cons and then whether or not might make

sense for you guys to set up an LLC S

Corp or other type of business entity

you don't know that much about sole

Partnerships this video is going to

answer all your questions and if it

doesn't then feel free to leave any

questions down below and I'll do my best

to get to those all the resources that

we talk about in this video are gonna be

down below in the description and yeah

let's get started okay so first of all

what is a sole proprietorship a sole

proprietorship is an unincorporated

business owned by one person so let's

say I go out there and I start you know

flipping couches right if I do that and

I start making money then I'm

automatically considered a sole

proprietor this does not require any

federal registration although you can

choose to get an EIN but it is not

required all profits from your business

are going to be taxed as personal income

tax so it's all passed through so

essentially when it comes down to it a

sole proprietorship is the default

business entity that you're

automatically assigned once you start

making money there's nothing you

actually need to do to have a sole

proprietorship this is what the default

business type name is yeah like I said

it's all predatives they don't require

any special paperwork and if you're in

business alone and are considered a sole

proprietor then the great news is that

all the profits that you make they're

going to go straight to you and you

won't need to you know share it with any

other shareholders or anything like that

now in terms of the different types of

sole Proprietors this can literally be

any type of business right so you can be

an independent contractor you can do

crave work you can have a brick and

mortar business although I will say if

you have a business that big it's

probably going to make sense to get an

LLC or S Corp if franchise is you have

people that are doing side hustles you

know selling things pretty much most

businesses that you can do are going to

be able to be a sole proprietorship now

with the sole proprietorship you

basically have complete control over

your business right you are the only CEO

and this works really well for single

owner businesses that don't need to

share profits or assets of course that's

also harder for you to build a business

if it's just yourself and besides that

you'll need to file a tax return and pay

taxes on any income or profit earned

it's going to be on your personal tax

filing uh we'll cover more of this later

on and with a sole proprietorship just

as with an LLC S Corp whatever you can

hire as many people as you want and sort

of like a business that is based on you

it's like based under your name if that

makes sense so now let's talk about how

you can actually set up your sole

proprietorship so that it's running

smoothly and in compliance like I

mentioned earlier there's no actual

paperwork to file your business as a

sole proprietorship it's just what it is

by default so yeah you're pretty much

skipping the filing portion of it okay

so first up is of course with any

business is uh choose your business name

and potentially register it with the

state you can see if your business name

is trademarked this is always something

that's good to do but of course if you

have a very very small business then you

might not need to but if it's something

that you're trying to grow big into a

big business later on then you will want

to search the USPTO website to see if

your business name is available if it's

not then you know potentially choose

something else because if it is already

taken then that company can actually

come after you for damages for using a

name that's too similar or exactly the

same as theirs if you do want to get a

trademark we'll leave a link down below

for the most affordable way to get a

trademark it does cost a good bit of

money but it can be worth it if you're

trying to build a business for the long

term the next thing you may want to do

is register your DBA name so if you're

doing business not as like for me my

name is Charlie Ching if my business is

called Charlie Chang then I wouldn't

need a DBA but if I was doing business

as you know let's say Charlie Chang

creative or something like that then I

would want to have my DBA name DBA

basically stands for doing business as

that's also known as fpn or a fictitious

business name yeah it just makes it more

formal if you are doing business under

some other type of business name we'll

leave a link down below if you do want

to get a DBA or fpn that process is also

pretty simple again not 100 necessary

even though you're technically supposed

to but if your business is really small

then you know it might not be worth your

time but just to be proper and for this

presentation if you're doing business as

anything besides your name then you will

want that DBA next is you're going to

want to buy and register a domain name

now having a web presence is obviously

very very important it really does help

with your marketing so what I recommend

doing is find a domain name that is the

same as your business name they'll

basically be marketing your business

through your website it's where your

potential clients or whatever are going

to be able to see your work maybe even

book you or send you messages stuff like

that if you're looking for a good

website building platform we definitely

just recommend Wix it's super affordable

they have a free plan but I definitely

recommend getting a paid plan because

that's going to allow you to use a

custom domain name which is 100

necessary and then guys do you want a

full Wix tutorial we'll leave that down

below in the description as well for us

you may need to register for any

business licenses that you need

personally I didn't do this when I was

starting out on my businesses for

example my photography business but if

you want to be really proper then you

should have the proper licenses

sometimes they may need a business

license to be able to open up a business

bank account for you but a lot of the

times they won't need that you'll simply

just need an EIN number you know on top

of that there may be any permits or

other licenses or certifications that

you may need for your business this

really depends on where you were located

and the business type so I recommend

doing your own research the next step is

optional and that is getting your EIN

Ein stands for employer identification

number and applying for an EIN is free

it's quick and it's very easy you can

also pay service like ink file to do

this for you but if you do want to do

yourself it is very very easy and now I

will say that for sole Proprietors you

don't need to have an EIN if you don't

have any employees or a retirement plan

if you have employees or a retirement

plan then your business is probably big

enough and making enough money where it

makes sense to have an LLC or S Corp and

yeah so this is a completely optional

step what you guys can just do is create

a separate bank account in your own name

that way you can sort of separate your

personal stuff from your business

finances and that leads us to The Next

Step which is opening up a business bank

account of course you don't need to do

this if you are a sole proprietor the

money can just flow into your personal

bank account which you know is treated

pretty much the same since this is a

pass through business type but yeah

having a dedicated business account is

definitely good and if you want to take

your business seriously then I

definitely do recommend getting a

separate business bank account one that

we recommend using is Novo we'll have a

link Down Below in the description and

again this is just pretty much to

separate your personal finances from

your business finances if you do create

that Ein the good thing is that you know

you can actually start building business

credit and that will allow you to get

business loans and financing next is

you'll want to have some type of

accounting system the reason for this is

because you really do want to track your

business income as well as your expenses

you want to know what's going in and you

want to know what's going out we just

recommend using QuickBooks freshbooks is

also a good one but most people out

there choose QuickBooks and yeah this is

the best way to just basically have all

your finances you know easily tracked as

well as organized so that makes tax

preparation a lot easier but yeah like

I've mentioned you guys if you have a

very very small business the money can

of course just go into your personal

bank account but you will definitely

need to file that on your taxes as your

income and that's going to be using a

Schedule C AKA form 1040. this is a part

of your personal tax return and so

you'll basically put all your income as

well as your expenses on that form and

that is sort of going to be like your

business tax filing if that makes sense

right it's not a separate entity it's

still connected to you so that's why

it's on your personal tax return for

each of your separate sole

proprietorship businesses you'll have a

separate Schedule C 1040 form and on

that form you're going to have all the

income and expenses for that particular

business this is basically what I did

before I set up my first LLC in escort

all my business income was on that 10

44. step number nine is you may want to

invest in business insurance this really

depends on your guys's case depends on

what type of service or business you

have and then hiring employees I want to

include this because you know I started

doing my business just by myself and I

was working for myself for a long time

but the bad thing about that is that you

know you can't grow as fast you're not

working in a team yeah I definitely

recommend hire help if you can employees

are definitely a little bit harder to

have than independent contractors but it

basically allows you to leverage other

people's time and it may help you grow

your business faster Step 11 is pay your

necessary taxes okay this is very very

important we sort of already covered it

but as a sole proprietor you definitely

do need to pay income taxes on all the

money that you are making so as I said

earlier you're going to use Schedule C

on form 1040 and you're going to report

all your income and all your expenses

yes this may result in the loss that's

totally okay and this is all going to

get you know pulled together with your

personal income from your job or

whatever else and yeah this is very

important guys you don't want to not

follow your sole proprietorship business

taxes this can get you guys in a lot of

trouble the penalties are pretty severe

so definitely don't neglect paying your

taxes you also want to be able to prove

to the IRS that your business is not

just a hobby some people will create a

fake sole partnership business like

let's say Photography they buy a lot of

equipment they don't make any money from

it so they just file a loss on the form

1040. you guys can do that for one or

two years but after that the IRS is

going to be like this is not an actual

you know business this is just a hobby

and so we're not going to allow this

anymore with your sole proprietorship

business you're gonna have to pay

federal taxes for sure you may need to

pay state income taxes depending on what

state you are in there's also these

self-employment tax this is 15.3 percent

as of right now and there also may be

any local taxes as well you may also

need to pay estimated quarterly payments

throughout the year if you do make a

significant amount of money so that's

why it's super important to track your

income and expenses as you go again I

want to emphasize that for any type of

business record keeping is extremely

important so you'll want to keep

receipts you'll want to save emails you

want to have invoices contracts all that

stuff make sure your bank statements are

accessible maybe have a copy of them and

of course have that bookkeeping system

set up if you don't want to pay for a

bookkeeping software you can always just

use Excel if your finances are not that

complicated but for any you know actual

business I definitely recommend using

something like QuickBooks now let's talk

about some of the pros and cons of

having a sole proprietorship and whether

or not it's the best option for you okay

first of all let's talk about the

advantages right so of course there are

minimal startup costs starting a sole

partnership is just by default it

doesn't require any legal fees there's

no filing fees or anything like that and

there's no minimum franchise tax that

comes with you know LLCs and S Corps

there's also tax benefits guys you don't

need to have an LLC or S Corp in order

to take tax deductions so as a sole

partnership any expenses that are

related for your business those can

actually be deducted on you know like I

said in Schedule C and that's going to

subtract from your income the goal of

this is that we want to get our net

income as low as possible because that's

going to reduce the amount of taxes that

we pay and of course if you have a sole

partnership it's just going to be you

and you are going to have direct control

over your a business now as far as the

disadvantages there are some first is

personal liability so when you have your

sole proprietorship there is no legal

separation between you and your business

so if your business does something wrong

and it gets sued by someone they can

actually come after not only your

business assets but also your personal

assets that can be pretty detrimental if

you have a lot of equity in your

mortgage or whatever it is so if you

have a business where you may get sued

then it might make sense to set up an

LLC so yeah the big con is that your

personal life is not separated from your

business second thing is it's difficult

to raise capital I mean if you're a sole

proprietorship you probably don't need

Capital but just something to you know

know and you're gonna be pretty Limited

in terms of how big you can build your

business if it's a sole proprietorship

so when it comes to sole proprietorship

versus a partnership versus an LLC or S

Corp you want to consider what is right

for you if you guys are just starting

out you're not making any money yet and

you're doing some type of business you

know that is not going to get you sued

then you can likely just stay as a sole

price Partnership if you have two people

working together you're going to need a

partnership and if you actually want

personal liability protection as well as

the possibility of further tax benefits

then it's going to make sense to do an

LLC escort or other type of business

entity I think for a lot of you guys

watching this if you're just starting

out just starting to make money a sole

proprietorship is completely fine just

leave it as is have the business filed

on your schedule C but once you guys

actually create a real business that you

want to really grow or that you want to

you know separate from yourself

personally then it's going to make a lot

of sense to get an LLC or an S corp if

you're making over let's say forty

thousand dollars of net profit per year

in your business I'll say it's probably

gonna make a lot of sense for you to get

that LLC and when you do get that LLC

make sure it's taxed as an escort so

there is a form for you guys to fill out

to have it be you know treated as an

s-corp election or you guys can go ahead

and create an S corporation by itself

it's a little bit complicated we have a

lot of other videos on these topics on

this channel so feel free to reference

those if needed basically you can save a

good chunk of money if you make over

forty thousand dollars net profit by

switching to an LLC tax as an escort it

basically comes down to that 15.3

percent self-employment tax that you

guys can avoid on any distributions

we're not going to go into detail in

this video but just know that that is a

big reason why a lot of people switch to

an LLC or escort if you guys do want to

get a full tutorial on how to set up an

LLC or escort we'll leave those links

down below because those may be a better

choice for you so yeah that's basically

all you guys need to know about Sole

proprietorships and what they mean for

you as a business owner if you're just

getting started go out there maybe file

a DBA under your own name for your

actual business name and start making

money after a while you guys can

actually form your LLC or S Corp and

make your business more official so

that's it for today's video I really

hope you guys got some value out of it

feel free to reference this video at any

point because I know we did Cover a lot

of stuff and yeah if you guys enjoyed

the video make sure to hit that like

button and also subscribe for more

content just like this this whole

channel is dedicated to free guides and

tutorials helping you start your

business thank you for your time I'll

see you in the next video

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