A San Jose Business Attorney Discusses Sole Proprietorships
When you are preparing to start your own business, a San Jose business attorney can advise you regarding the advisability of running it as a sole proprietorship or as another entity type. A sole proprietorship is the simplest structure under which a business may be organized, but there are important things you should understand about it before deciding to select this entity type to run your own business.
If you are currently running your own one-person business, you may already be operating it as a sole proprietorship. The simplest type of a sole proprietorship is one that is automatically in effect once the person starts conducting their business activities, even if they did not file any paperwork with the state. An example of this type of sole proprietorship may include freelance work, such as writing, or contract work.
Zoning Rules, Permits and Licenses
While California does not require you to file paperwork with the state in order to set up a sole proprietorship, you still need to investigate the local zoning laws and permit and license requirements. If you are running your business out of your home, for example, you may be limited to a specified number of customers each day or other matters. Your local government may also require you to get a business permit or license, so you might want to check with your San Jose business attorney about the particular requirements in your area.
Unlike a limited liability company, or LLC, a sole proprietorship will not limit your liability in the event something goes wrong. If your business owes debts that you are unable to pay, the creditors can go after both your assets as well as those of your business. Similarly, your assets may be used to satisfy a civil judgment in any lawsuit filed against your business as well. This is why many people choose to instead set up a limited liability company instead of running their business as a sole proprietorship.
As a sole proprietor, you can hire workers. If you do so, however, you must apply for and receive a federal employer identification number, or FEIN, from the IRS. California also requires you to apply for and receive a state employer identification number as well. This helps the taxing bodies to make certain you are paying the required payroll, Social Security and other taxes for your employees. If you intend to use contract employees, you’ll need to file the appropriate paperwork and submit 1099s for them each year. It is important for you to make certain that your employees are truly contract workers and that they should not be treated as hourly workers under IRS and state laws first, however. You’ll also need to provide workers’ compensation coverage to any employees you might have in case they are injured while working for you.
It is a good idea to have a business insurance policy if you have customers that come on your premises or if you regularly drive as a part of your work. If someone is injured while they are at your home for business reasons, they might be able to sue you and your business under a theory called premises liability. If you or an employee are involved in a vehicle accident while working, you can also be sued. A general liability policy may provide protection in the event such a mishap occurs. Normally, it’s best to buy a separate business policy. However, you can check with your own personal insurance agent about the possibility of adding coverage for your business to your existing policy as a rider. Some companies will agree to do this, while others will not.
Taxes and Profits
The profits you make from a sole proprietorship pass through to you. This means that your business income and losses are reported on your own personal income tax forms rather than your business being required to file separate business tax forms. As a sole proprietor, the responsibility for withholding taxes, Social Security and Medicare amounts is placed on you. You’ll be subject to a self-employment tax that you will be required to pay every year. You’ll need to check with the IRS to learn more about the amount you should withhold as well as your filing requirements. You may also need to pay use tax or sales tax as well to the state, depending on the nature of your business activities.
California does not require you to register your sole proprietorship with the state. You can start it simply by working and calling it a sole proprietorship. City requirements differ, however. San Jose requires all people who are conducting business in the city to register and to get a tax certificate. You’ll need to check with the city about how to do so as well as the associated taxes and fees. The city will require you to pay annual taxes for your business as long as you continue conducting business in San Jose as well.
Choosing Your Business Structure
It is important for you to understand what the most appropriate type of business entity is for your particular venture. Each different structure has its own tax and documentation requirements. Limited liability companies provide protection to you and your personal assets in the event something goes wrong, as do corporate structures. Although sole proprietorships are the easiest to establish and thus the most popular structure, the structure may not be the best one for you to choose. It is probably a good idea for you to seek the advice of a business and commercial law attorney about the available entity types and what might work best for your business. An attorney may advise you regarding the entity type they believe will work best for you, provide the most protection and have the best tax benefits.