Becoming your own boss takes lots of time and diligent planning. It also takes great, mutually supportive relationships and contacts.
Most of all, it takes work, work and more work. You need to commit resources to learning exactly what it will require to take their venture from potential opportunity to profitable enterprise.Â For some, becoming your own boss is a natural step.
If you already have a side hustle and are ready to transition into making it a full-time paying gig, take cues from the success playbook of celebrity stylist and designer, Ty Hunter Â (BeyoncÃ©, ServedFreshâ„¢) who transitioned from working in the healthcare industry before following his passion of fashion and styling.
The U.S. has more individually owned businesses, or sole proprietorships, than corporations, the Tax Foundation reports. Today, there are 1.7 million traditional C corporations, compared to 7.4 million partnerships and S corporations, and 23 million sole proprietorships.
A sole proprietorship is the simplest and most common structure chosen to start a business. What’s more you do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities, notes the U.S. Small Business Administration. In fact, you may already own one without knowing it. If you are a freelance writer, for example, you are a sole proprietor.
But like all businesses, you need to obtain the necessary licenses and permits. Regulations vary by industry, state and locality. Use the Licensing & Permits tool to find a listing of federal, state and local permits, licenses and registrations you’ll need to run a business. If you choose to operate under a name different than your own, such as Maxine’s Shea Butter, you will most likely have to file aÂ fictitious nameÂ (also known as an assumed name, trade name, or DBA name, short for “doing business as”). You must choose an original name; it cannot already be claimed by another business.
There are pros and cons to having a sole proprietorship. The biggest advantage of course is that you are entitled to all profits and are responsible for all your business’s debts, losses and liabilities. To help you along your journey, here are four things that you need to know:
- Tax Implications: Because you and your business are one and the same, the business itself is not taxed separately, so the sole proprietorship income is your income. You report income and/or losses and expenses with a Schedule C and the standard Form 1040. Â The “bottom-line amount” from Schedule C transfers to your personal tax return. It’s your responsibility to withhold and pay all income taxes, including self-employment and estimated taxes. You can find more information about sole proprietorship taxes and other forms at IRS.gov. You’re required to pay estimated taxes on a quarterly basis. Many sole proprietors get into the practice of setting aside a percentage with each payment received (think of this like a self-imposed tax withholding).
- Accessing Capital: Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won’t often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails. However, some angel investors provide private equity to sole proprietors and other small businesses to fund startup operations or finance existing business ventures. Female entrepreneurs with innovative solutions-oriented products or services can check out the Pipeline Angels Network to pitch their businesses.
- Mixing Equipment and Supplies: Many sole proprietors get confused trying to figure out which business expenses are considered equipment vs. supplies. Supplies are things that get used during the year (i.e., printer ink, paper, envelopes, etc.) while equipment typically are higher-value things that last longer than a year such as computers, software and office furniture. Supplies are reported on Schedule C, but equipment needs to be reported on Form 4562. You have the option to write off the full amount on your tax return (there is a max limit), or you can write off a portion for each year it’s in use.