While we’re not lawyers and cannot give legal advice, we do often times get questions from 1099 contractors on the legality of operating as a sole proprietor (e.g. not having a legal entity such as an LLC or S-Cop or C-Corp) so we wanted to put this post together to help provide you with insight.
Legality of Operating as a Sole Proprietor (and Things to Consider)
A sole proprietorship is the most basic and common way to operate a business. A sole proprietorship is an unincorporated business where the sole owner pays personal income tax on the profits from the business. Legally, there is no distinction between you as a business owner and the business. You are entitled to all of the profits from your business and in turn you are also responsible for all of the losses and liabilities of the business.
Legal Requirements for Sole Proprietorships
However, operating a business as a sole proprietorship doesn’t mean that there aren’t any rules that you need to follow. In many states and municipalities, you will be required to obtain a business license and certain permits before you can operate your business. You may also decide that you want to use a fictitious business name, which is commonly referred to as a “DBA.” If you choose to use a DBA for your business, your state may also require you to register the DBA for your business.
Sole Proprietorships and Taxation
As a sole proprietor, you will be considered as self-employed for tax purposes. The IRS requires that you report all income and expenses related to your rideshare or homeshare business whenever your net earnings for the year exceed $400. You must report your income and expenses on Schedule C and the self-employment tax you owe on Schedule SE, when you file Form 1040. As a self-employed individual, you are also responsible for paying self-employment tax on a quarterly basis during the year.
Although, a sole proprietorship offers many advantages with regard to the filing and reporting rules, one major drawback is the potential liability. As a sole proprietor, you are personally responsible for all of the debts of your business, which may exceed all of your personal assets. If your business is sued and a judgment is brought against your business, all of your personal assets, including bank accounts, retirement accounts, and even your car or home could be at risk.
In addition, it is not possible to raise capital by selling stock in the business to potential investors with a sole proprietorship. Sole proprietorships also do not retain value because they are not likely to survive death or the incapacity of the owner.
The Bottom Line
While there is no easier way to launch a business than as a sole proprietor and it is perfectly legal to operate your rideshare or homeshare business as such, the potential liability is a major drawback.