Starting a business is hard. So, if you want to make it simple, you should start with a sole proprietorship. It’s a type of business where you and the company are the same. It also makes payments very easy and convenient, as long as you understand the concept and follow a few simple steps. This article will cover various topics about sole proprietorship to help you understand what it is and what’s it all about.
What is a Sole Proprietor?
According to a statement from the Internal Revenue Service (IRS), a sole proprietor is a person who owns an unincorporated business and runs it by themselves. That means a business under sole proprietorship can still trade or operate under a different name than your own. However, that person will be the single owner of that brand. That also means all profits from the business will go to you, which also gives you the obligation to report them.
Pros and Cons of Sole Proprietorship
As with any business model, the sole proprietor also has its fair share of advantages and disadvantages. There are a few pros and cons that you need to acknowledge.
- Sole proprietorships can start doing business immediately. You won’t need to incorporate; however, keep in mind that you may still need to get a business license. You can educate yourself by looking over some guides on business licenses online.
- You won’t need a lawyer. Legally, you can make it happen on your own without any legal help.
- Simple taxes. You’ll only need a single form to accomplish your tax duties.
- Liability. A significant difference between a sole proprietorship and a corporation is that the latter serves as a bugger between you and a client. As a sole proprietor, there are high chances that you will personally be chased down for your business-related debts.
- More work. Sole proprietorship requires you to do more as a business owner. You’ll have more responsibilities to handle, as well as a multitude of tasks to fulfill.
- More taxes. While accomplishing your taxes will only take one form, the tradeoff is the amount of taxes you’ll be paying. Specifically, you’ll have to pay for both personal and self-employment taxes.
Before you jump into sole proprietorship, make sure you assess the options that you have. Determine which business structure you will opt for based on what you’re looking forward to doing. For instance, if it’s a small business or a self-employed practice, sole proprietorship is a great option. However, if you want your business to grow into something big or work in a formidable industry that often deals with legal issues, setting up a corporation, a limited liability company (LLC), or a limited liability partnership (LLP) is the best option.
How Do I Pay Myself?
No matter what business structure you choose, the bottom line is always to get paid for the services or goods you provide. The first step towards getting paid as a sole proprietorship is by setting up a business bank account. As a rule of thumb, you should always separate business from personal transactions.
Setting up a business bank account will solve that issue. If you’re not using a different name for your business, you can open a business account under your own name. If you’re looking to use a different business name, the IRS states that you’ll need to file a “Doing Business As” (DBA).
Once you have a business account, make sure you put all sales, checks, and income from your business directly to that account. Having a dedicated credit card or charge card for your business is also essential. That way, you can pay all business-related expenses directly and everything in one place.
To get paid, you’ll need to transfer money from your business account to your personal account. So instead of you receiving a salary, you will receive a “draw.” To accomplish this process, you’ll need to write a check, send a transfer, or make a direct deposit. Next, keep track of the transaction. If you’re using accounting software, you can mark the transaction to yourself as “disbursement” or “owner’s equity.”
How Much Should I Pay Myself?
To determine how much you should pay yourself, you’ll need to calculate the amount of profit you expect your business to make. Also, compute the instances that you’ll be drawing a paycheck from the business.
Having a business bank account and credit card will make it easier to log in to your accounting software. From there, you can calculate your net sales minus your expenses. Once you know the amount left, you can calculate how much you will pay for yourself.
In terms of frequency, the most common options are bi-weekly or monthly. When calculating your pay’s value and frequency, make sure you consider your personal goals and lifestyle. Some people prefer contributing to savings, while other focus more on traveling or quality time with family and friends.
In the beginning, you could opt to pay yourself the bare minimum. That way, your business can break even and make a profit as soon as possible. Starting a business is costly, which is why you’ll need to earn back your capital and start making real money. Once you’ve broken even, you can start increasing your pay based on how much you’re worth.
If your business is doing well, you can even give yourself a bonus every month or quarter. You can even increase your salary. Just make sure that you’re keeping close track of your expenses. Set aside some money for your taxes and make sure you don’t overspend.
Filing Taxes as a Sole Proprietor
As mentioned earlier, filing for taxes as a sole proprietorship is simple compared to other business structures. When you draw, you won’t need to pay federal or state taxes; you won’t even need to pay for social security or Medicare taxes. All you need is to file a ‘Form 1040 Schedule C’ to the IRS once a year.
If you want to know how much deductions you’ll receive, add up all your business expenses for various categories like advertising, meals, or car expenses. There are quite a few expenses that you can deduct, so make sure you review your spending throughout the year to see what the IRS will consider the deductible.
Personal Income Tax Returns
You will also need to file for your personal income tax return. However, the number for that is relatively simple – it’s going to be the remaining business profit after you’ve deducted your business-related expenses and paid out your taxes.
Keeping Track of Your Finances
While it may be the simplest business structure, a sole proprietor will still want to make book management as simple and easy as possible. You can do this with accounting software.
Accounting platforms will help you calculate how much you need to pay yourself, as well as how much money you owe in taxes. Software systems built for accounting will let you manage your income and expenses. The most important part is that they make it as simple and straightforward as possible. That way, you won’t get confused or lose while you’re using the software.
Managing Your Books
You should have all the stats your need about your business at your fingertips. With accounting software, you can stay focused on running your company while living your life to the fullest. Look for the best accounting software for your needs today.
In terms of invoicing, you can also put your trust in ReliaBills. From creating your invoice to sending them to your customers, you can do everything – and more – on the ReliaBills website. Choose from a series of templates and customize your invoice to your liking. You’ll even receive a notification via email on the progress of your invoice. All you need to do is create a FREE account, and you’re ready to go.
Sole proprietorship is a great business structure. However, it’s only viable for the right type of business. If you plan to choose this business model, make sure you understand it fully. Use this article as a resource, research other important information, or approach someone who is currently running a sole proprietorship for some tips and valuable advice. Educate yourself and make sure you are fully knowledgeable before you start venturing towards this route. Best of luck!