The big apple is full of opportunities. If you live in New York City, or anywhere in the state, maybe starting a small business is your calling. If you are not sure whether you want to start an LLC or corporation, it is always better to start small. A sole proprietorship is a simple business structure that is easy to manage, operations and tax-wise, making it a good option for budding entrepreneurs.
If you have no idea where to start, this article will guide you through every step of the process. It will show you how to choose a name, how to register your business if needed, fill you in on how taxes work, and answer all your questions about sole proprietorships in New York.
But before anything else, let’s take a look at what a sole prop is and what type of businesses a sole prop is best for.
What is a sole proprietorship?
The simplest and most common business entity used to start a business in the United States is called a sole proprietorship. These businesses are formed when a single owner creates an unincorporated business and runs that business as an individual.
In a sole proprietorship, there is no legal entity created, so there’s no difference between the owner and the business. This means the owner is entitled to all profits raised through the business and files them as part of their personal income taxes. However, this also means that any debts and losses are attributed to the individual, as well as them being implicated in any lawsuits brought against the business.
Who is a sole proprietorship best for?
If you are planning to start a business along with a partner or multiple partners, a sole proprietorship is not an option. The structure will be a good fit only if you plan to operate your business entirely independently, or with employees who report to you as the owner.
Many people choose a sole proprietorship if they need to quickly start their business or want to avoid filing fees and paperwork. In fact, if you are running the business in your own name, there is no paperwork to fill out at all to register your business. This allows the business to get up and running quickly with no friction.
A sole proprietorship comes with personal liability and it may be more difficult to secure a line of credit or investments.
How to set up a sole proprietorship in New York
1. Choose your business name
New York law allows you to operate a sole proprietorship under a name other than your own. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the New York Department of State’s website to see if the name you chose is taken or if something similar exists.
In New York, a business name must not:
- Match any other business name in the state
- Be misleading
- Use any certain government agency terms or abbreviations like FBI or EPA
2. File a trade name
To do business under a business name, you need to file a DBA (doing business as) or a fictitious name certification with the state.
Filing a trade name is essential if you want to open a business bank account or do business as a different name. You can fill out an application at your county clerk’s office. The filing fee varies from county to county.
If you decide to run a business under your legal name, no paperwork or registration is required. However, many people do want a business name. If that’s the case, you must register it with the state.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your startup, you may need to obtain a variety of business licenses or permits. This is managed by the New York Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
You should also explore local regulations like building permits and zoning clearances where appropriate.
In the state of New York, businesses need tax registration before selling goods and services. You might need to obtain an alcoholic beverage tax license, mortgage recording tax, taxicab tax, highway use tax, hazardous waste tax, and more. It all depends on the nature of your business.
As for other business licenses, you will also need to obtain one depending on your profession. For example, barbershops, tanning salons, accountants, and other professions need a special license to legally operate and sell their services. You can visit the New York State office of professions to learn more.
Other permits like zoning permits and building permits will also be needed if you are not running an online business that you can do from home.
4. Obtain an Employer Identification Number (EIN)
If you’re planning a new hire, you need to obtain an EIN. This nine-digit number is issued by the IRS and used for tax purposes when you need to report wages. You can file for an EIN online through the IRS website.
If you do not have employees, you can use your Social Security Number to file taxes and are not required to have an EIN. However, some banks will require new business owners to have an EIN to open a business bank account, so you may want one anyway.
Once you have these pieces in place, your own business is ready to operate! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
An LLC, or limited liability company, is another common structure used for small businesses in the United States. While an LLC can have a single owner, it can also be owned by multiple people working together. The key differentiator for an LLC is that it offers protection of the owner’s personal assets. As a separate legal entity, an LLC is liable for debts and legal obligations, but the owner cannot be personally liable for these items. If the business fails, the owner could file for a business bankruptcy without owing business creditors their own money.
If you’re wondering about the difference between freelancing and setting up a sole prop, you’d set up a sole prop if you plan to hire other writers to work with you. A freelancer, or independent contractor, can’t hire people, but a sole prop can.
What are the advantages of a sole proprietorship?
Simplified tax preparation
For the owner of a sole proprietorship, tax preparation is not much more complicated than it is for any other private citizen. In preparing personal taxes, the owner will include all profits and losses related to the business, which is calculated as a part of their income or expenses. This also means the tax rate stays at their individual rate as opposed to higher business and corporate tax rates.
Less paperwork and fees
To register most types of business, the state requires you to file your business name for inclusion in their directory and pay a fee. The sole proprietorship does not have to do this. There will be some paperwork and fees involved if you require licenses or permits, or you plan to operate under a fictitious name.
The sole proprietor of a business is responsible for everything, both good and bad. While liability is placed on that owner, they also enjoy complete control of their business. Any business decisions will be solely their responsibility, without worrying about pleasing shareholders or disagreements with a partner.
What are the cons of a sole proprietorship?
No asset separation
In a sole proprietorship, there is no legal separation between the assets of an owner and the business. While this makes things like taxes simple, it also means there is no delineation between the liabilities of an owner and their business. This means that if the business is not successful, the business’s debts fall to the sole proprietor, and if they cannot pay, it is their personal assets that will be seized. In the case of a lawsuit where money is owed, the same is true.
Single point of failure
When only one person is responsible for an entire business, it means that they are the single point of failure. If a sole proprietor passes away, becomes incapacitated, or is incarcerated, the business is usually not able to survive. While a corporation can be taken over as a legally separate entity, a sole proprietorship must be run by the owner.
Less availability of funding
With this business structure, finding startup funds could be tough. Many banks and investors do not like to offer funds to sole proprietors, as they cannot gain shares of the company or be sure that business debts will be repaid. Many government grants and business loans also exclude sole proprietorship.
How are sole proprietors taxed in New York?
With this form of business, taxes are a part of the personal tax return of each owner. Business profit is calculated and reported on a Schedule C form which is for Profit or Loss from Small Business.
A Schedule C will calculate the income of the business, including all income and expenses, along with the costs of goods sold and costs for home-based businesses. The rest of the calculation is the net income, which is the amount of taxable business income.
This net income is entered on the Schedule C and included with other income and losses the owner (and their spouse) report on their income tax return.
The small business owner then pays taxes on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Every sole proprietorship in New York needs to pay a 15.3% tax rate for self-employed individuals. To report your taxes, you will need to create a business account on the New York State Department of Taxation and Finance website to learn more about the taxable income of your business. Creating an account will enable you to secure a way to file tax returns, schedule payments, respond to department notices, and more.
It is a convenient process, especially for sole proprietors who are learning about reporting and paying business taxes.
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor must pay Social Security and Medicare taxes. If the business operates at a loss, tax payments are not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and business taxes that are applicable.
You must report all income to the New York State Tax Department, whether you received cash, check, direct deposit, prepaid card, or any other method. However, you can also claim tax deductions from business activity, such as advertising, commissions, fees paid, fuel, mileage traveled, parking and toll fees, car loan interests, mortgage, insurance, phones, repairs, and more. To learn more about other state-specific taxes, you can visit the New York Taxation Department’s website.
Being a sole proprietor or a self-employed individual is somewhat the same in the state of New York. If you own a sole proprietorship, you are considered a self-employed business owner.
Sole proprietors in New York do not get taxed more. However, it costs more to file because of the extra taxes you need to pay, making it more expensive to maintain. In New York, you are allowed to deduct 100% of your self-employment health insurance premium on your taxes if you are self-employed or own a sole proprietorship. However, you do have to pay self-employment taxes.
In addition to your state and federal taxes on your personal income tax, self-employed individuals also need to pay 15.3% tax to cover your SSN and Medicare. As an employee, you split the rate with your employer, and the reason it is so high when you own a business is because you are considered both the employee and employer.
As a sole proprietor in New York, you can write off expenses from your taxable income. You can write off fuel expenses, operation expenses, and other expenses that you pay to operate your business. These tax write-offs are excellent ways to lower your tax bill when you file your personal income tax return.