Transcription
Hey guys, it's Charlie here, and in today's video, I'll be doing a complete presentation about sole proprietorships and everything you need to know about them. So, if you're a new business owner, you might be wondering, what's the difference between a sole partnership, an LLC, S Corp, C Corp, all that stuff? The great news is that you can actually start building your business right away with a sole proprietorship. This is the default business entity that you are, you know, automatically assigned right when you start making money with whatever business or side hustle you have. There's actually a lot of really important things that you guys need to know. We'll go through all the different steps to setting up and making sure that your sole proprietor is, you know, handled correctly. We'll go through the pros and cons and then whether or not it might make sense for you guys to set up an LLC, S Corp, or other type of business entity. If you don't know that much about sole partnerships, this video is going to answer all your questions, and if it doesn't, then feel free to leave any questions down below, and I'll do my best to get to those. All the resources that we talk about in this video are gonna be down below in the description, and yeah, let's get started.
Okay, so first of all, what is a sole proprietorship? A sole proprietorship is an unincorporated business owned by one person. So, let's say I go out there and I start, you know, flipping couches, right? If I do that and I start making money, then I'm automatically considered a sole proprietor. This does not require any federal registration, although you can choose to get an EIN, but it is not required. All profits from your business are going to be taxed as personal income tax, so it's all passed through. So, essentially, when it comes down to it, a sole proprietorship is the default business entity that you're automatically assigned once you start making money. There's nothing you actually need to do to have a sole proprietorship. This is what the default business type name is. Yeah, like I said, it's all predatives, they don't require any special paperwork, and if you're in business alone and are considered a sole proprietor, then the great news is that all the profits that you make, they're going to go straight to you, and you won't need to, you know, share it with any other shareholders or anything like that.
Now, in terms of the different types of sole proprietors, this can literally be any type of business, right? So you can be an independent contractor, you can do gig work, you can have a brick-and-mortar business, although I will say if you have a business that big, it's probably going to make sense to get an LLC or S Corp. If franchises, you have people that are doing side hustles, you know, selling things, pretty much most businesses that you can do are going to be able to be a sole proprietorship. Now, with the sole proprietorship, you basically have complete control over your business, right? You are the only CEO, and this works really well for single-owner businesses that don't need to share profits or assets. Of course, that's also harder for you to build a business if it's just yourself. And besides that, you'll need to file a tax return and pay taxes on any income or profit earned. It's going to be on your personal tax filing. Uh, we'll cover more of this later on. And with a sole proprietorship, just as with an LLC, S Corp, whatever, you can hire as many people as you want, and sort of like a business that is based on you, it's like based under your name, if that makes sense.
So now let's talk about how you can actually set up your sole proprietorship so that it's running smoothly and in compliance. Like I mentioned earlier, there's no actual paperwork to file your business as a sole proprietorship. It's just what it is by default, so yeah, you're pretty much skipping the filing portion of it.
Okay, so first up is, of course, with any business, is uh, choose your business name and potentially register it with the state. You can see if your business name is trademarked. This is always something that's good to do, but of course, if you have a very, very small business, then you might not need to. But if it's something that you're trying to grow big into a big business later on, then you will want to search the USPTO website to see if your business name is available. If it's not, then, you know, potentially choose something else because if it is already taken, then that company can actually come after you for damages for using a name that's too similar or exactly the same as theirs. If you do want to get a trademark, we'll leave a link down below for the most affordable way to get a trademark. It does cost a good bit of money, but it can be worth it if you're trying to build a business for the long term.
The next thing you may want to do is register your DBA name. So, if you're doing business not as, like, for me, my name is Charlie Ching. If my business is called Charlie Ching, then I wouldn't need a DBA. But if I was doing business as, you know, let's say Charlie Ching Creative or something like that, then I would want to have my DBA name. DBA basically stands for "doing business as." That's also known as FPN or a fictitious business name. Yeah, it just makes it more formal if you are doing business under some other type of business name. We'll leave a link down below if you do want to get a DBA or FPN. That process is also pretty simple. Again, not 100% necessary, even though you're technically supposed to, but if your business is really small, then, you know, it might not be worth your time. But just to be proper and for this presentation, if you're doing business as anything besides your name, then you will want that DBA.
Next is, you're going to want to buy and register a domain name. Now, having a web presence is obviously very, very important. It really does help with your marketing. So, what I recommend doing is find a domain name that is the same as your business name. They'll basically be marketing your business through your website. It's where your potential clients or whatever are going to be able to see your work, maybe even book you or send you messages, stuff like that. If you're looking for a good website building platform, we definitely just recommend Wix. It's super affordable. They have a free plan, but I definitely recommend getting a paid plan because that's going to allow you to use a custom domain name, which is 100% necessary. And then, guys, do you want a full Wix tutorial? We'll leave that down below in the description as well.
For us, you may need to register for any business licenses that you need. Personally, I didn't do this when I was starting out on my businesses, for example, my photography business, but if you want to be really proper, then you should have the proper licenses. Sometimes they may need a business license to be able to open up a business bank account for you, but a lot of the times they won't need that. You'll simply just need an EIN number. You know, on top of that, there may be any permits or other licenses or certifications that you may need for your business. This really depends on where you were located and the business type, so I recommend doing your own research.
The next step is optional, and that is getting your EIN. EIN stands for Employer Identification Number, and applying for an EIN is free, it's quick, and it's very easy. You can also pay a service like InkFile to do this for you, but if you do want to do it yourself, it is very, very easy. And now, I will say that for sole proprietors, you don't need to have an EIN if you don't have any employees or a retirement plan. If you have employees or a retirement plan, then your business is probably big enough and making enough money where it makes sense to have an LLC or S Corp. And yeah, so this is a completely optional step. What you guys can just do is create a separate bank account in your own name. That way, you can sort of separate your personal stuff from your business finances.
And that leads us to The Next Step, which is opening up a business bank account. Of course, you don't need to do this if you are a sole proprietor. The money can just flow into your personal bank account, which, you know, is treated pretty much the same since this is a pass-through business type. But yeah, having a dedicated business account is definitely good, and if you want to take your business seriously, then I definitely do recommend getting a separate business bank account. One that we recommend using is Novo. We'll have a link down below in the description. And again, this is just pretty much to separate your personal finances from your business finances. If you do create that EIN, the good thing is that, you know, you can actually start building business credit, and that will allow you to get business loans and financing.
Next is, you'll want to have some type of accounting system. The reason for this is because you really do want to track your business income as well as your expenses. You want to know what's going in, and you want to know what's going out. We just recommend using QuickBooks. FreshBooks is also a good one, but most people out there choose QuickBooks. And yeah, this is the best way to just basically have all your finances, you know, easily tracked as well as organized so that makes tax preparation a lot easier. But yeah, like I've mentioned, you guys, if you have a very, very small business, the money can, of course, just go into your personal bank account, but you will definitely need to file that on your taxes as your income, and that's going to be using a Schedule C, aka Form 1040. This is a part of your personal tax return, and so you'll basically put all your income as well as your expenses on that form, and that is sort of going to be like your business tax filing, if that makes sense, right? It's not a separate entity, it's still connected to you, so that's why it's on your personal tax return. For each of your separate sole proprietorship businesses, you'll have a separate Schedule C 1040 form, and on that form, you're going to have all the income and expenses for that particular business. This is basically what I did before I set up my first LLC and S Corp. All my business income was on that 1040.
Step number nine is, you may want to invest in business insurance. This really depends on your guys's case, depends on what type of service or business you have.
And then hiring employees. I want to include this because, you know, I started doing my business just by myself, and I was working for myself for a long time, but the bad thing about that is that, you know, you can't grow as fast. You're not working in a team. Yeah, I definitely recommend hiring help if you can. Employees are definitely a little bit harder to have than independent contractors, but it basically allows you to leverage other people's time, and it may help you grow your business faster.
Step 11 is, pay your necessary taxes. Okay, this is very, very important. We sort of already covered it, but as a sole proprietor, you definitely do need to pay income taxes on all the money that you are making. So, as I said earlier, you're going to use Schedule C on Form 1040, and you're going to report all your income and all your expenses. Yes, this may result in a loss, that's totally okay, and this is all going to get, you know, pulled together with your personal income from your job or whatever else. And yeah, this is very important, guys. You don't want to not file your sole proprietorship business taxes. This can get you guys in a lot of trouble. The penalties are pretty severe, so definitely don't neglect paying your taxes. You also want to be able to prove to the IRS that your business is not just a hobby. Some people will create a fake sole partnership business, like, let's say photography. They buy a lot of equipment, they don't make any money from it, so they just file a loss on the Form 1040. You guys can do that for one or two years, but after that, the IRS is going to be like, this is not an actual, you know, business, this is just a hobby, and so we're not going to allow this anymore. With your sole proprietorship business, you're gonna have to pay federal taxes for sure. You may need to pay state income taxes depending on what state you are in. There's also this self-employment tax, this is 15.3% as of right now, and there also may be any local taxes as well. You may also need to pay estimated quarterly payments throughout the year if you do make a significant amount of money. So that's why it's super important to track your income and expenses as you go. Again, I want to emphasize that for any type of business, record keeping is extremely important. So you'll want to keep receipts, you'll want to save emails, you want to have invoices, contracts, all that stuff. Make sure your bank statements are accessible, maybe have a copy of them, and of course, have that bookkeeping system set up. If you don't want to pay for a bookkeeping software, you can always just use Excel if your finances are not that complicated, but for any, you know, actual business, I definitely recommend using something like QuickBooks.
Now let's talk about some of the pros and cons of having a sole proprietorship and whether or not it's the best option for you. Okay, first of all, let's talk about the advantages, right? So, of course, there are minimal startup costs. Starting a sole partnership is just by default. It doesn't require any legal fees, there's no filing fees or anything like that, and there's no minimum franchise tax that comes with, you know, LLCs and S Corps. There's also tax benefits, guys. You don't need to have an LLC or S Corp in order to take tax deductions. So, as a sole partnership, any expenses that are related for your business, those can actually be deducted on, you know, like I said, in Schedule C, and that's going to subtract from your income. The goal of this is that we want to get our net income as low as possible because that's going to reduce the amount of taxes that we pay. And of course, if you have a sole partnership, it's just going to be you, and you are going to have direct control over your a business.
Now, as far as the disadvantages, there are some. First is personal liability. So, when you have your sole proprietorship, there is no legal separation between you and your business. So, if your business does something wrong and it gets sued by someone, they can actually come after not only your business assets but also your personal assets. That can be pretty detrimental if you have a lot of equity in your mortgage or whatever it is. So, if you have a business where you may get sued, then it might make sense to set up an LLC. So, yeah, the big con is that your personal life is not separated from your business. Second thing is, it's difficult to raise capital. I mean, if you're a sole proprietorship, you probably don't need capital, but just something to, you know, know. And you're gonna be pretty limited in terms of how big you can build your business if it's a sole proprietorship.
So, when it comes to sole proprietorship versus a partnership versus an LLC or S Corp, you want to consider what is right for you. If you guys are just starting out, you're not making any money yet, and you're doing some type of business, you know, that is not going to get you sued, then you can likely just stay as a sole price partnership. If you have two people working together, you're going to need a partnership. And if you actually want personal liability protection, as well as the possibility of further tax benefits, then it's going to make sense to do an LLC, S Corp, or other type of business entity. I think for a lot of you guys watching this, if you're just starting out, just starting to make money, a sole proprietorship is completely fine. Just leave it as is, have the business filed on your Schedule C. But once you guys actually create a real business that you want to really grow or that you want to, you know, separate from yourself personally, then it's going to make a lot of sense to get an LLC or an S Corp. If you're making over, let's say, forty thousand dollars of net profit per year in your business, I'll say it's probably gonna make a lot of sense for you to get that LLC. And when you do get that LLC, make sure it's taxed as an S Corp. So there is a form for you guys to fill out to have it be, you know, treated as an S Corp election, or you guys can go ahead and create an S corporation by itself. It's a little bit complicated. We have a lot of other videos on these topics on this channel, so feel free to reference those if needed. Basically, you can save a good chunk of money if you make over forty thousand dollars net profit by switching to an LLC taxed as an S Corp. It basically comes down to that 15.3% self-employment tax that you guys can avoid on any distributions. We're not going to go into detail in this video, but just know that that is a big reason why a lot of people switch to an LLC or S Corp. If you guys do want to get a full tutorial on how to set up an LLC or S Corp, we'll leave those links down below because those may be a better choice for you.
So, yeah, that's basically all you guys need to know about sole proprietorships and what they mean for you as a business owner. If you're just getting started, go out there, maybe file a DBA under your own name for your actual business name, and start making money. After a while, you guys can actually form your LLC or S Corp and make your business more official. So that's it for today's video. I really hope you guys got some value out of it. Feel free to reference this video at any point because I know we did cover a lot of stuff. And yeah, if you guys enjoyed the video, make sure to hit that like button and also subscribe for more content just like this. This whole channel is dedicated to free guides and tutorials helping you start your business. Thank you for your time. I'll see you in the next video. [Music]