Establishing a company within the United States can be fairly straightforward, and an entrepreneur has so many unique business structures to choose from. One of them is a sole proprietorship, offering its benefits and features. In this article, we’ll explore what a sole proprietorship is, how it works, and why it can benefit you as a business owner planning to work alone to provide your products and services.
What does sole proprietorship mean?
In the simplest of terms, a sole proprietorship is a type of entity considered unincorporated and can act as the legal basis for an individual to operate within a framework that allows them to trade professionally. Similar to a sole trader in other parts of the world, a proprietorship set up for a single company owner is their base of operations. It’s their way to provide a professional service to their market whilst being covered by being officially registered to trade. Unlike freelancing, where an individual trades under their name, a sole proprietorship can allow them to do so while using a professional entity to provide their products and services.
How to set up a sole proprietorship
One of the quickest and easiest ways to set up this type of business structure is by enlisting the aid of a company formation firm. They can handle the application process from beginning to end, negating the need to spend hours filling in forms as these specialists work on behalf of their clients to take care of the technicalities and then submit the relevant documentation as required by law.
Furthermore, this entire process can be handled remotely, without the owner even needing to be present within the United States, allowing international enterprises to be established whilst using an address within the US to ensure that they are properly protected and able to trade and pay tax officially. Alternatively, a company owner can choose to set up the sole proprietorship themselves, although this can be tricky as there are several aspects that might be a challenge to achieve if the individual isn’t present in the country.
Do I need an EIN for a sole proprietorship?
If you are a sole proprietor and plan on keeping your business to yourself, then you won’t need an EIN (Employer Identification Number) to trade legally. This means that if you don’t plan on hiring any employees and want to provide your services or products in an individual setting, then an EIN can be avoided. Likewise, if you don’t intend to file a pension plan tax return, or submit any excise, then you won’t need an EIN either, making this option very popular for international service providers wanting to operate within the US.
On the other side of the coin, you’ll need to apply for an EIN if you have employees that work for you or if you intend to submit a tax return that will be used to contribute towards a pension plan. Alternatively, many sole proprietorship owners prefer to apply for an EIN simply to add an additional layer of authenticity to their business or if they plan on hiring employees in the future. Furthermore, you will need an ITIN (Individual Taxpayer Identification Number) to file tax returns for your sole proprietorship.
How are sole proprietorships taxed?
One of the biggest benefits of a sole proprietorship relates to tax, specifically the fact that there is no need to submit a dedicated tax return for the sole proprietorship itself. Instead, the owner will be able to process their self-assessment and tax return as they did before establishing the new entity. This means they can declare all their relevant income, earnings, profits, losses, and expenses via one form. When a self-assessment tax return (tax declaration) is returned to the IRS, it can be used to provide all relevant information pertaining to the sole proprietorship itself, as the individual responsible for it will be trading as a sole proprietor.
Can a sole proprietorship have employees?
Yes, but in order to do so officially, the owner will need to apply for an EIN. With this, they can go on to hire employees and use their Employer ID Numbers for documentation as required. Likewise, an employee can use their employer’s EIN for any official paperwork when submitting their tax return. It’s important to note that the employee will still need to handle their own tax return unless the entity is upgraded to another structure.
Advantages and disadvantages of a sole proprietorship
The main advantage is the ability to manage one’s own tax returns, operate as a legally recognized entity, and work at a pace suitable for the needs of the company owner (such as part or full-time). The disadvantages include not being recognized as an incorporated entity, which could provide particular perks and protection from liability. Unlike a multi-member or single-member LLC (Limited Liability Company), any malpractice or wrongdoing will fall on the owner of the sole proprietorship.
The difference between a sole proprietorship and an LLC
The main difference between these two entities is that with a sole proprietorship, any responsibilities will fall on the owner to take care of, including legal liability and so on. With an LLC, the ‘limited’ aspect considers that the company owner and the company itself are, in fact, two separate entities, with a lower level of liability for the person in charge.
How to change a sole proprietorship to an LLC
This can be done in 5 or 6 easy steps, made all the simpler with a dedicated company formation firm handling the technicalities on behalf of the application. First, the new business name must be confirmed for the LLC. Next, articles of organization must be submitted. Then, an LLC operating agreement must be created, followed by filing an SS-4 form to apply for an EIN. Lastly, a new bank account must be established, and all relevant business licenses and permits must be obtained.
Establish your sole proprietorship or LLC with Workhy
With Workhy, establishing a business as a sole proprietor within the United States can be fast, efficient and stress-free. The Workhy team not only assists with all your relevant company formation procedures, but we can also help with EIN form applications, taxation, bookkeeping, opening online bank accounts, and more. Visit our website for detailed information.
