Working for yourself while doing something you love and enjoy doing can be an exciting venture. However, if you are starting a sole proprietorship, then there are some legal issues to consider. If you're thinking of going into business, then it's important to consider if this type of business structure is right for the type of work you want to do. Here is more information on how sole proprietorships are defined and what special legal problems you may have to deal with if you start one.
Definition of a Sole Proprietorship
Sole proprietors are individuals or families that are in business for themselves. Many sole proprietors have few or no employees and keep the business assets under their own name. People who work as an independent contractor on a per-task or per-contract basis are usually considered sole proprietors. If you are working and you're not on someone else's payroll, then you are likely a sole proprietor even if you only work and get paid by one client.
While sole proprietorships are easy to start and require no special registration or paperwork, you do have to deal with the serious issue of liability. When you are a sole proprietor, your personal and business assets are mixed together. This means that if someone sues your business, then your own personal assets, including your home, are at risk. If you feel that you are in the type of business that could open you up to lawsuits, such as opening your business to the public, then you may want to consider incorporation instead. Incorporating basically keeps your business and personal assets separate.
Unlike being incorporated, your business income is reported on your personal income tax with a Schedule C. Additionally, since you are basically your own boss, you will have to actively remember to pay your social security and medical taxes yourself rather than relying on an employer to deduct that for you. You may also have to make regular estimated tax payments throughout the year. However, being taxed as a sole proprietor is comparatively simple compared to being incorporated where you may have additional fees and paperwork.
Starting your sole proprietorship is fairly easy -- all you have to do is start working for yourself. Be sure to check with your city and state to see if your business requires any special permits or fees. If you're planning to start working for yourself, are already a sole proprietor with legal issues, or you want to change your legal structure to something more protective, then contact a small business attorney for more information.