Self-Employment Laws
By: Source: AARP.org Date Posted: 2006-01-19 17:56:33.092946-05:00
Sole proprietorship? Limited liability company? Business licenses? Employment taxes?
As you plan to set up your business, your head reels with legal information. You wonder how to choose the business structure that's best for you. You worry about how to follow laws you don't even know about, or don't understand.
Such thoughts are normal. You have lots of help to find answers and make good choices about:
- What kind of business structure is best for me?
- What business licenses do I need?
- What should I do about taxes?
Business Structures
Almost all businesses have one of these legal structures:
- Sole proprietorship
- Partnership
- Corporation
- Limited liability company
Most small businesses begin as sole proprietorships.
The structure you choose depends on many factors. Get professional advice before you decide. Pay special attention to how much control you want to have in your business, how much paperwork you can deal with, and how open your business might be to lawsuits. Each business structure handles taxes a little differently. Be sure to know which system you prefer.
The information below can help you start thinking about the right structure for your business. Then analyze your ideas in a small-business start-up course or with a small-business adviser.
Sole Proprietorship
What it is: One-person business – just you. The business is you – you own it and operate it.
Advantages: Easy to set up. You have complete control. You get all income - and any losses.
Disadvantages: You are responsible for any business debts. Creditors can come after your personal assets, like your house. It is harder to get loans.
Taxes: You report everything on your personal income tax returns. You pay self-employment taxes (Medicare and Social Security) and federal and state taxes quarterly.
Partnership
What it is: You and one or more people share ownership. You must make an agreement with your partner(s) about who will do what.
Advantages: Easy to set up. You and your partners all contribute time, ideas, and energy. Can be easier to get loans when there's more than one owner.
Disadvantages: You share profits. There can be disagreements. Each partner is responsible for debts and taxes; personal assets can be at risk. Each partner is liable for other partners' actions.
Taxes: Partners report their share of everything on their personal tax returns. The partnership must also file a federal income tax form. Partners pay their own self-employment and federal and state taxes quarterly.
Business licenses
Next, find out what permits or licenses your business will need.
You will need a federal permit or license only if you sell something that a federal agency oversees. An example is selling investment advice, which the U.S. Securities and Exchange Commission regulates.
Each town, city, county, and state sets its own permit and license requirements. Check with each. Do you plan to work mainly via the Internet from home? You must still follow the permit and license rules of the place where you live.
For example, many counties require permits for certain kinds of businesses, for putting up a business sign, or for having customers come to a business located in your home.
Most states require people doing a certain kind of work to obtain a license. State license requirements apply to a wide range of jobs, such as psychologists, mechanics, accountants, and real estate agents.
Many states require you to register your business name through a Doing Business As (DBA) license. That allows you to open a business bank account to write and cash checks for your business. Keep in mind that many sole proprietors handle their business finances through their personal bank accounts. It's essential to keep separate records for personal and business expenses and income.
Some state license requirements have to do with paying sales tax on what you sell or following environmental rules.
The Internal Revenue Service (IRS) makes it easy to find out which state, local, or federal permits or licenses your business needs. Its Web site links you to your state, where you can find town, city, and county license requirements.
Business taxes
Most small businesses need a federal tax identification number called an Employer Identification Number or Employer ID number (EIN).
Many small business owners can just use their Social Security number as their EIN. Even if you need an EIN, it's easy to get. You can find and file IRS Form SS-4 online, for free.
The IRS says you will need an Employer ID number only if you:
- Have employees.
- Operate your business as a partnership or corporation.
- Are involved with more complex business matters. These are explained clearly on the IRS Web site.
Otherwise, using your Social Security number is fine.
The Internal Revenue Service Small Business Tax Workshop will teach you the basic tax aspects of running a small business. Get a free workshop CD or take the course online. Topics include:
- The tax difference between a hobby and a business
- How each business structure handles taxes
- Record keeping and accounting
- Business tax requirements
- Employment taxes if your business has employees
- Using your home as your business location
- Tax incentives and credits for your business
Make sure you understand when you have to pay self-employment tax. This is a Social Security and Medicare tax for people who work for themselves. It is similar to the tax withheld from your check if you have a job. Like federal income tax, you pay self-employment taxes through quarterly estimated tax payments. Find details in IRS Publication 533.
Additional Resources
IRS Small Business One Stop Resource
This very well organized information makes taxes seem almost easy. Through the IRS Online Classroom, take the Small Business Tax Workshop or get the CD version. Both are free.
SBA Training Resources
Find the right place to learn and get advice on your business structure, licenses, and taxes. Courses and counselors are in your community and online. Use a Small Business Development Center, SCORE, a Women's Business Center, or a Business Information Center.
Everyday Law for Everyday People
Answers to questions about business structure and operations. Use Nolo's reliable and up-to-date small business information - online and in print and downloadable books.
Books
Find this book online at www.barnesandnoble.com
The Small Business Start-Up Kit: A Step-by-Step Legal Guide, Peri H. Pakroo. Nolo Press, 2003. Think through and start your business. Learn everything from choosing a legal structure and business name to government requirements and accounting. All the forms you need are here and on CD-ROM.
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