Yes, a family owned business can be started and managed as a sole proprietorship. This is perhaps the easiest and most common structure for brand new businesses. However, it may not work for all family businesses because it involves ownership and operation by a single individual, with zero separation between the business and owner.
Sole proprietors can still hire employees or independent contractors, so it may still work for some families, as long as it is understood that one person is primarily running the show. Smaller owner – operator family businesses are usually structured as sole proprietorships with no legal separation between the owner and the business.
Note that with this business structure, all properties and liabilities are in the owner’s name and the owner is liable for any legal or financial issues in the business. Start-up and compliance requirements are minimal, and profits and losses are passed down to the owner and claimed on the owner’s personal tax form using Schedule C (Form 1040).
As far as taxes go, if one spouse is employed by another, the wages of the spouse are subject to income tax withholding and Social Security and Medicare taxes, but not to the Federal Unemployment Tax Act (FUTA). Also wages for children under age 18 are not subject to Social Security and Medicare taxes and not subject to FUTA if the child is under age 21. Wages are subject to income tax withholding, regardless of the child’s age.
However, if the business is run by both spouses, who also share in the profits and losses, then the business is now considered a partnership even if there is no formal partnership agreement. Business income and loss are no longer reported on a Schedule C (From 1040) and the couple are now required to use Form 1065.
However, there is an option for married couples to own and operate a business together; especially if they elect to be treated as a “qualified joint venture” instead of a partnership, and that’s if they would like to continue to file as sole proprietors for federal tax purposes. In this case, each spouse must file a separate Schedule C to report their share of profits and losses.
Howbeit, since there is no legal separation between the owner and the business in a sole proprietorship, in the case of the owner’s death, the business will terminate, and its assets will become part of the owner’s estate.
In addition, even if the owner is married (with or without children) the business does not necessarily get passed down to the remaining family members. A sole proprietor is expected to include a provision in his or her will directing the business be sold or appointing a successor or successors.
But in the case of divorce between the sole proprietor and the spouse, unless the spouse is a co – owner, there is no automatic sharing of the assets and the details will be worked out in the divorce procedures.
Steps to Form a Sole Proprietorship in the United States
When forming a Sole Proprietorship, note that you don’t have to form a business entity to begin working, but there are still necessary steps you will need to take to start your business. You should complete all of these steps before you open your doors for business.
Table of Content
Analyze your Risks
Starting your family business as a sole proprietorship is more like exposing your personal finances to a world of liability. That’s not bad on its own, but it can go very badly for you if you haven’t given any thought to the risks. Before you get too far down the road, consider these questions:
- Can you imagine a scenario in which your business could cost someone money or do harm?
- Is there anything about your work that might prompt someone to sue you?
In some businesses, the risks are clear. Not to be a pessimist, but when it comes to risk, you need to think of worst – case scenarios. If after analysing you feel your business could cause harm that you couldn’t repair easily and quickly, consider buying insurance to transfer the risk or filing LLC documents to form an entity that shields you from those liabilities.
Obtain an Employer Identification Number (EIN)
Also it is advisable to obtain an EIN. Note that you can get one for free in minutes through the IRS online application. Despite its name, an EIN is not just for employers. This number is a universal identifier, much like a Social Security number, for your business. If you don’t have one, you will have to use your Social Security number on tax forms and other official documents, exposing your personal information unnecessarily.
Name your Adventure
When starting as a sole proprietor, you can more or less use your personal name and a literal description of the service you provide as your business name without filing any paperwork. However, if you want to name your business something else, you must apply for a “doing business as” or fictitious name. To do this, you will have to:
- Research name restrictions: Note that most states restrict use of certain words in business names. For example, words such as “trust” and “fidelity” may not be used in many states without written permission from regulatory authorities because of their associations with banking and insurance.
- Search name availability: Names must also be distinguishable from those of other businesses on record in your state. In most states, you can run a name availability search through the secretary of state’s website to see if your desired name is available.
- Register your name: Once you’ve settled on a viable name, you can usually submit a fictitious name registration online along with a small fee.
Pay Estimated Taxes
As a sole proprietor, if you expect to owe more than $1,000 in income tax from your business this year, then you are expected to make quarterly estimated tax payments to the IRS. Consult Form 1040 – ES for full instructions. However, if you’re just scaling up your business, you won’t have a history of sole proprietorship taxes and income to go on.
Strive to project your gross income for the year minus business expenses to arrive at an estimate of net annual income. Divide it by four, and pay income tax and self – employment taxes quarterly based on that figure. However, as the year progresses, you can make adjustments to each quarterly payment based on your actual income and expenses. You want to get close, but it doesn’t have to be perfect. Always remember that the IRS will fine you if you underpay substantially, but otherwise, it’ll all be reconciled with your final tax return.
Register for Taxes
Coupled with federal income taxes, you will also have to register your business for applicable state, county, and local taxes. If you hire employees, you will have to register for payroll taxes. Also, if you sell taxable goods or services, you are expected to register with your state revenue department to collect and remit sales and use taxes. If you have an online store with significant sales in multiple states, you may need to register for sales tax in each of those states.
Also note that if you buy goods for resale, you will have to apply for a reseller’s certificate. You can present this when buying goods for resale so you don’t have to pay sales tax on them. Consider a simple document management system to keep your records straight, especially if you need to apply for any of the licenses and permits below.
Obtain Licenses and Permits
As a Sole Proprietorship, you may also have to apply for licenses and permits at the state, county, and municipal levels to operate your business. Note that this involves filling out an application, paying a fee, and submitting it to the appropriate authorities. Nonetheless, types of permits to consider include:
- Premises permits: You may be required to obtain a home occupancy certificate, sign permits, or other facilities permits to operate your business. These are often required at the local level.
- Occupational licenses: Note that every state licenses its own set of professions, from nail salons to funeral homes. Before you begin offering goods or services, make sure you know the licenses required for your profession.
- Regulated activities: You may need permits for regulated activities such as food service and games of chance.
Unfortunately, many family businesses tend to start out too casually when it comes to creating formal operating documents and legal structure and this have caused so many problems over the years. Although it is never advisable to structure your family business as a Sole Proprietorship, one great thing about sole proprietorships is that you don’t have to go all in all at once.
You can start a side gig, test your theories, pivot, and even start over if need be — all with very little hassle or commitment. That makes it an ideal structure for growing the seed of an idea into the family business of your dreams.
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