Scenario: you don’t have your own legit business today. You have a couple of people you’ve done some work for once or twice this year and you’ve been paid a little bit of money. You don’t want to start a sole proprietorship because you read that you should start an LLC or SCorp, so you’re planning to set that up when you have a little more time.

Sound familiar?

Well, let me be the first to say…Congratulations—you’re a business owner!

A Sole Proprietorship: You Might Already Own a Business and Not Even Know It graphic

If you have “a couple of people you’ve done some work for” and “you’ve been paid a little bit of money” you have clients and income. You already have a business—even though you don’t have an LLC or SCorp or any other legal business structure.

In a nutshell, if you provide a service or if you sell something, and collect money from it**, you have a sole proprietorship—unless you’ve formed a legal structure for that business (if you don’t know what I mean by “formed a legal structure”, then you probably haven’t done it).

**This is all assuming that what you do or sell is legal. Side Hustle Business School encourages legal side hustles.

*Also, I’m not a lawyer. I don’t play a lawyer on TV. This is not legal advice. For legal advice, please consult an actual, practicing lawyer. 

As an example, when you design a logo for a client, and they pay you, you’re operating as a sole proprietor. That’s generally all it really takes to have a sole proprietorship.

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Before you get all nervous, you haven’t done anything wrong. Many businesses start this way. You probably don’t need to go run out and start filing any papers or doing anything much different than what you have been doing.

You should, however, be aware that you already are running a business. Which means if you were “waiting to start your business one day”, but you’re already getting paid, you’re actually not waiting to start your business.

You’ve already started your business and just didn’t know it.

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So How Does a Sole Proprietorship Work?

Right quick, let’s talk about what a business actually is. This should help you understand how a sole proprietorship actually works.

In the most simple terms, a business is a legal entity that:

  • has a name,
  • a tax ID number (like an Employer Identification Number or EIN),
  • and can be taxed.

You—as a person—also have a name, a tax ID number (your Social Security Number), and can be taxed.

When you’re a sole proprietor, your business can share all of those things with you because it is not its own legal entity. Your business is you.

If you haven’t registered a separate business name with your state, then your business’s name is your name. For example: your clients will make checks out to your government name, “Victoria Washington”. They won’t be writing checks to a fictional name like “Victoria Washington Designs”. Well, they can, but you won’t be able to cash them.

If your business doesn’t have an EIN number, it shares your social security number. And, if you’re bringing in enough money as a sole proprietor, you’ll be taxed—just like you would working for someone else. However, you may be taxed at a different rate/percentage.

Each state has its own rules for how you should run a sole proprietorship. Here’s a guide that outlines what’s necessary in each of the 50 states in the USA.

You might have a few other questions about what you can and cannot do now that you realize you’re already running an actual business. Here are some common questions about a sole proprietorship that you might have right now.

What are the pros and cons to a sole proprietorship?

One clear pro is that some of the things you’re purchasing for your business, or even parts of your rent or mortgage, could be tax deductible.

One clear con? In order for there to be tax deductions, you’ll have to actually report your side hustle’s earnings and losses on your taxes. As an FYI, if you already file your taxes regularly, it really isn’t much more complicated to do taxes for your business for a sole proprietorship.

Does having a sole proprietorship mean I can get a business checking account or credit card?

Yes and no.

Yes: if you want your business’s cards to say your government name (though, that would just be a normal credit or debit card and you don’t need a business for that to happen).

No: if you want your cards to have your business’s name on them instead of your own name. That “no” can become a “yes” if you’ve filled out the correct DBA (Doing Business As) paperwork—paperwork that says you will be doing business (meaning collecting and spending money) under a name that isn’t your name.

The rules for the DBAs can vary state to state. Your state might not even require you to register it at all, but check out the rules to be safe.

Basically, your business may need its own documented name if you don’t want your business to use your name. You can use “Craig Johnson”, if that’s your name, and open up bank accounts—like the accounts you probably already have.

But if you want accounts in the name “Craig Johnson’s Auto Detail”, then you’re going to need to fill out a DBA for “Craig Johnson’s Auto Detail”.

Make sense?

So can I go from a sole proprietorship to an LLC or SCorp?

Yep. And many businesses do. One huge reason that people don’t usually want to keep a sole proprietorship for very long is because you don’t have a business structure to protect your personal assets.

Which means, if a client sues you and you lose the suit, they don’t just take the stuff that your business owns, the way they would with an LLC, they can take what you own.

Just like your day job: if you do something at your day job and a client sues the company, the client isn’t coming after your car, your savings, your shoe collection. They’re coming after the company’s property. “The company” is a legal entity separate from you.

If your personal client sues you as a sole proprietor, they can sue you for your stuff because there’s no separate “company” to sue. As a sole proprietor, you are your company—and your company is you. Even if people work for you, but we’ll get to that later.

There are usually forms of insurance that can help protect you and the things you own (a.k.a. your assets). The kind of insurance and the type of coverage you’re eligible for will vary depending on your business type. But, generally, working on behalf of a company—even one that you own—can remove some or all of your personal liability.

Staying a sole proprietor for a long time can also hurt you if you try to bring in investors. It’s harder to get people to invest because they’re, in a way, financially backing you and not a company that exists as its own legal entity. Also, you can’t sell shares of a company because, frankly, you can’t sell shares of yourself.

Can I hire people if I have a sole proprietorship?

Yes, you can. However, you’ll need to get an Employer Identification Number for your sole proprietorship. You can do this without setting up an LLC or SCorp. Be warned, as an employer, you’re legally responsible for anything that your employees do. Meaning, if your employees mess up and get the company sued, it’s you that’s being sued—and your personal assets are up for grabs. Seriously consider, at minimum, getting good insurance or setting up an LLC—which, by the way, stands for Limited Liability Company.

Is it all starting to make sense now?

What about taxes?

I am far from a tax professional, so here’s what I can tell you: ask the IRS. Generally, if you use an online service to help you fill out your taxes, you’ll be asked the right kinds of questions to help you file properly. But, so that you have a clear understanding, this chart should help you figure out what you need to fill out for your federal taxes.

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Whew. That was a lot.

For many people, the idea of setting up a business is the scariest part of becoming an entrepreneur. After everything I just laid out, I can totally understand why. However, the reality is that so many people are already legit business owners and don’t even know it.

True story: some of you are living in fear of something you’ve already handled. Whether or not your goal was to have a sole proprietorship or not, you may already have one—which means that you’re already the entrepreneur that you thought you were going to become one day.

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Posted by Naya the Creative

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