Is a Sole Proprietor a Small Business?

Small Business

Is a Sole Proprietor a Small Business?

Updated on December 02, 2019

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Although a sole proprietorship is the simplest way to structure a small business, you may be unsure how being a sole proprietor affects your health insurance options. If your sole proprietorship has employees, then you may be able to qualify for group health insurance. Keep reading to learn more about your options for health insurance as a sole proprietor.

What is a sole proprietorship?

The Small Business Administration defines a sole proprietorship as an unincorporated business owned and run by one individual, with no distinction between the business and the owner. The sole proprietor is entitled to all profits and is personally responsible for all of the business’s debts, losses, and liabilities.

  • For tax purposes, the income of the sole proprietorship is the income of the owner, because the owner and his or her business are considered one and the same.
  • You should know that a sole proprietorship, even if operated under a fictitious name or trade name, is not considered a separate legal entity. Instead, it means the person who completely owns the business.
  • The IRS explains that if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

Can a sole proprietorship be defined as a small business?

Since the sole proprietorship and its owner are considered identical, a sole proprietor can generally be defined as a small business when it comes to qualifying for a small business health insurance plan; however, if you have no employees but yourself, then your sole proprietorship will likely not qualify you for a group plan.

Like other small business owners, sole proprietors do have the ability to hire employees. As per the IRS, any time a sole proprietor hires an employee other than an independent contractor, the sole proprietorship will need to obtain an Employer Identification Number (EIN). When working without employees, the sole proprietor’s Social Security number identifies the company for tax purposes.

Can sole proprietorships get small business health insurance?

No, sole proprietors usually do not qualify for group insurance, unless the sole proprietorship includes at least one full-time equivalent employee.

To qualify for a group insurance plan, your sole proprietorship would need to have one common-law, or full-time equivalent employee beyond yourself, your spouse, or any independent contractors. Otherwise, without one qualified employee, the sole proprietor can only get individual health insurance from the health insurance marketplace or a licensed insurance agent.

What is a common-law employee?

According to the IRS, under common-law rules, anyone who performs services for your business is considered to be your employee (instead of a contract worker) if you control both what must be done and how something must be done.

Based on the business’s degree of control and oversight, the IRS mentions three general considerations to find out if the person providing a service is an employee or an independent contractor.

  • Behavioral: Does the business have the right to control what the person does and how the person performs his or her job?
  • Financial: Are the business aspects of the person’s job (including pay, reimbursements, and tools and supplies provided) controlled by the business?
  • Type of Relationship: Are there written contracts or employee type benefits, such as a pension plan, insurance, or vacation pay? Will the working relationship continue, and is the work performed a significant part of the business?

What are the qualifications for small business health insurance?

In addition to being registered as a business based on your state’s regulations, you do need to have at least one employee in order to qualify for small business health insurance. You must also contribute to paying for employees’ monthly premiums as a business owner.

As per the employer mandate in the Affordable Care Act (ACA):

  • It is optional for businesses with less than 50 full-time or full-time equivalent employees to offer group insurance plans, although they can decide to offer a group plan and may qualify for a tax credit to assist with cost sharing.
  • Businesses with over 50 full-time employees are required to provide group plans to their employees and pay at least 60 percent of premiums in their cost sharing solution.

Whether or not you have employees as a sole proprietor, you can find both individual and group health insurance plans that fit your budget and preferences by visiting eHealth.com.

This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.

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