Sole Proprietorship and Your Small Business
Published on April 13, 2018
Going into business for yourself is an exciting prospect. Rather than help turn someone else’s vision into a reality, you are making your own dreams come true. With that freedom, however, comes added responsibility.
Here is what you need to know about your sole proprietorship status under the law and what your options are when it comes to purchasing health insurance.
What is a sole proprietorship by definition?
The IRS defines a sole proprietor as a person who owns an unincorporated business by themselves. Because sole proprietorships are not corporations under the law, this type of business owner typically files a regular 1040 and Schedule C form to note their profits and losses. The business is not a separate entity, and legally it is treated the same as any of the individual’s other assets or liabilities. In the case of legal action taken against your business, you are liable for any damage, and could lose your personal property as well as assets formally associated with the business.
A sole proprietor business is easy to establish; all you need to do is start working. In some cases, you may also want to use a separate name for your business, in which case you will have to file a “Doing Business As” (DBA). The DBA allows you to write checks, collect money, and market yourself under the business name.
A sole proprietorship business can be run by a single person or by two or both people in a contracted agreement known as a general partnership. In the case of a general partnership, each partner is liable for damages and must report their assets and losses on their own personal income taxes.
How is a sole proprietorship different from a limited liability company?
Like a sole proprietorship, a limited liability company (or commonly referred to as LLC) is not a corporation, or separate business entity, for tax purposes. Both of these business structures have “pass-through” taxation, with income and loss being reported on the business owner’s personal income tax form.
An LLC differs from a sole proprietorship in that the business has separate liability. If someone were to file suit against your business, they would sue the LLC, not you as an individual. Thus, in most cases the plaintiff would only be entitled to recover your business assets, not your personal property.
Can a sole proprietor business hire employees?
One of the more common misconceptions about a sole proprietorship, by definition, is that it has to be one person in business for themselves. In fact, sole proprietors can hire employees in the same way that corporations do, and there is no limit to the number they can hire. Unless the sole proprietorship chooses to rely on independent contractors, the business must file taxes on behalf of her employees and may be required to provide benefits as well.
Before hiring employees, a sole proprietor must obtain an employer identification number (EIN) and W-4 information from their employees so that they can withhold the right amounts from their employees’ paychecks.
What are the health insurance options for a sole proprietorship?
Individuals running businesses by themselves, or alone with their spouse, are not entitled to coverage under a group plan regardless of whether they hire independent contractors on a temporary basis. In this case, a sole proprietorship must look for an affordable individual or family health insurance plan, either from a licensed insurance broker or through the state health insurance marketplace.
On the other hand, if your sole proprietor business has regular employees, you may qualify for group health insurance under a small business plan. Using the IRS’s common law rules to determine whether a worker is an independent contractor or an employee, you will have to establish the following:
- You control the work performed by the people you hire.
- You are responsible for tax withholdings and providing materials for projects.
- The work performed is an ongoing feature of the business, for which the worker receives benefits and vacation time.
If you have at least one qualified employee besides yourself or your spouse, you are eligible for a group health insurance plan.
Individual health insurance
Although as a sole proprietor you may not make the cut for group health insurance, there are still plenty of great individual health insurance options for all budgets and health-care needs. Visit eHealth to see affordable health insurance options in your area.