Congrats! You’ve decided to start a business. What’s next? One of the first questions you’ll be asked is what type of business entity you’d like to conduct business under. The options include a Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Partnership, Limited Liability Company, C Corporation, S Corporation and finally a Professional Service Corporation.
In this first in a series of articles, we’ll cover the first option: Sole Proprietorship. The laws vary by state, so for the sake of this piece, we are sharing information for those doing business in New York City or State. If you intend to conduct business across state lines, depending upon the nature of how that business is conducted, you may have an obligation to file in other states.
What is sole proprietorship?
Many solopreneurs set up their businesses as a Sole Proprietorship. The definition of a Sole Proprietorship, for tax purposes, is that you own an unincorporated business by yourself. The business exists until the retirement or death of the owner. The downside of doing business as a Sole Proprietorship is that you don’t have any legal protection. If you get sued or go into bankruptcy, your personal assets, such as your home or car, are not protected.
Steps to setting up your small busniess as a sole proprietorship
An advantage of setting up your business as a Sole Proprietorship is that you don’t have to register your company unless you want to do business under a name that differs from your legal name. If you decide to call your company something besides your name, you’ll be “Doing Business As” (DBA). For example, if your name is Bob Brown and you want to name your company “Bob’s Amazing Shoes,” you’ll be required to file a Name Certificate since you’re Bob Brown DBA Bob’s Amazing Shoes.
It is not a requirement for Sole Proprietorship’s to have a Federal Employer Identification Number (EIN), though we recommend that our business clients file for one. You’ll need your EIN if you ever want to hire employees, open a business account (also strongly recommended), build your business’ credit, create a retirement plan or protect your privacy.
Next, you’ll want to set up a separate business account. We recommend using the same bank that you use for your personal account. If you anticipate using a credit card we strongly suggest you get one in the name of the business rather than using a personal credit card. You’ll also need to procure the required insurances.. Finally, we recommend hiring a professional bookkeeper.
What tax forms do I file as a solopreneur?
As a NYS/NYC resident, you may be already required to file Federal Form 1040 and NYS IT-201 (with your other income such as W-2). So in addition to all other income and losses that are required to be reported, the business income or losses will be reported on Schedule C of Form 1040 for Federal tax purposes and the same business income or loss will be reported on your NYS IT-201.
As a sole proprietor, your business income is also subject to self-employment tax, which is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. So instead of those Social Security and Medicare taxes being withheld, you will need to pay self-employment tax with your Form 1040. Keep in mind that as a self-employed individual, you may be required to remit taxes every quarter (called quarterly estimated tax payments) if you expect to owe income tax (including self-employment tax) of $1,000 or more for a particular tax year unless you had no tax liability for the prior year. If you don’t pay enough tax through withholding or estimated tax payments by the due dates, you may be charged a penalty.
The Metropolitan Commuter Transportation Mobility Tax
The Metropolitan Commuter Transportation Mobility Tax (MCTMT) is a tax imposed on employers and self-employed individuals engaging in business within the Metropolitan Commuter Transportation District (MCTD). The MCTD includes the counties of New York (Manhattan), Bronx, Kings (Brooklyn), Queens, Richmond (Staten Island), Rockland, Nassau, Suffolk, Orange, Putnam, Dutchess, and Westchester.
The MCTMT applies if a taxpayer has net earnings from self-employment allocated to MCTD that exceeds $50,000 for tax years beginning on or after January 1, 2012. The tax rate is .34% of the taxpayer’s total net earnings from self-employment. Self-employed individuals subject to MCTMT are required to remit quarterly estimated taxes.
NYC Unincorporated Business Tax
The filing of New York City Unincorporated Business Tax Return (Form NYC-202) is required by individuals and single member LLCs that carry on a trade, business, profession, or occupation wholly or partly within New York City and has a total gross income from all business regardless of where carried on of more than $95,000.
The filing of NYC UBT return doesn’t mean that you owe taxes immediately. There is full UBT credit available for NYC sourced net self-employment earnings of $100,000 or less and partial UBT credit available for NYC sourced net self-employment earnings between $100,000 to $150,000. NYC sourced net self-employment earnings of greater than $150,000 must pay the 4% UBT tax. Also keep in mind that a credit for NYC UBT tax paid is available to offset NYC income tax on a resident or part year resident.
Full-time employees or contractors
We’ll go into deeper details about this in another article, but to give a high level explanation, you’ll need to decide whether you want to hire an employee or independent contractor. If you hire an employee, you will need to provide employee type of benefits such as pension plan, insurance, vacation pay, etc. Intentionally misclassifying employees as independent contractors may result in being liable for criminal and civil penalties in addition to the employment taxes plus penalties and interest.
What you need to know about sales tax
If you sell tangible goods or certain services in New York, you may be liable for the collection and remittance of sales tax to the state government. This may also extend to the sales of goods and services into other states, depending upon certain criteria. This is a complicated area and requires guidance from a qualified accountant.
Next time we’ll explain which companies might want to register as a General Partnership and exactly what that entails. We’re here to answer any questions you might have related to setting up your business, taxes or anything else to help your business run smoother so you can focus on the important things.