Sole Proprietorship is a business owned and controlled by one person who is solely liable for its obligations as defined in the Merriam-Webster dictionary. What is sole proprietorship? It is an unincorporated business owned by a single owner and is responsible for its debt. The owner can start a business at any time within the year without having to register it. There is no registration fee paid to the Secretary of State. However, you can start any business in which you desire that you have an interest or expertise. For example, a cleaning service, day care, consulting, construction, accounting and bookkeeping service to name a few.
You will come up with a name, write a mission statement, vision statement, and a purpose statement. As a matter of fact, develop a business plan in order to prepare a plan of action for your business. Do not forget to research the business name selected to make sure it is not already being used.
For best business practice for record keeping, you should have a separate business checking account. This will assist in helping you to substantiate your income and expenses in case of an audit. It is best to keep your personal and business finances separate for recordkeeping purposes.
Therefore, to open a checking account you will need to obtain an employer identification number (EIN). Thereafter, apply for the EIN online on the Internal Revenue Service website at www.irs.gov. Thus, remember to research the bank to see what it has to offer your business as well as the fee structure.
What are the advantages and disadvantages of starting your business as a sole proprietorship?
When you file your personal income tax return, you will file the IRS Form 1040 and report the business income and expenses on the Schedule C. In addition to the Schedule C, you will file Schedule SE. The SE stands for self-employment tax. To calculate the tax use the net earnings amount. The SE tax is to remit the employee and employer portion of the Social Security and Medicare withholdings.
How can I prepare so I do not owe taxes? You can make estimated tax payments to the federal government using Form 1040ES. Remit estimated tax payments to the state government, if the state requires it. What form will I receive to file on my tax return? Beginning for the tax year 2020 filing, you will receive a Form 1099-NEC, if the amount is over $600.00. The NEC stands for nonemployee compensation. In previous year filings, it was the Form 1099-MISC. If the amount is under $600.00, it is your responsibility to keep track of the amount from the various clients and vendors. Yes, you have to report the income whether if it is cash, check, or credit card. To research more, please click here to view the IRS Publication 334 – Tax Guide for Small Business.
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