Here is the breakdown of a sole proprietorship in Texas. Although, there is still something to be said about opening up your own shop and tackling the world head on as a sole proprietor. Be wary because there is no legal difference between a sole proprietorship and the person who owns it. That means, there is absolutely no liability shield between the business and the owner.
THE BUSINESS AND THE OWNER
The owner is the boss and the sole proprietorship itself. One does not need to fill out any forms or other documents/registration with the state. Further, no publication or declaration needs to be given (although it would probably help the business to let others know you are now open for business).
There are two caveats to keep in mind:
- The county in which one operates may require an “assumed name” document to be filled out, but this will vary from county to county.
- There are some businesses that require some type of licensing in order to lawfully operate within the state. These are commonly found in businesses that sell alcohol or operate in retail.
THE BANK ACCOUNT, WHAT YOU OWE ME, AND WHAT I OWE YOU
As far as assets, liabilities, revenue, profits and losses are concerned, they all belong to the owner of the sole proprietorship. This is both freeing and binding. On one hand, everything that comes in and goes out comes in to you and goes out from you.
On the other hand, you are now responsible for everything that comes in and goes out. That means when rainy days come, the sole proprietor is personally vulnerable to actions by their creditors and this can mean their personal assets are also open to possession or seizure. A failure of the business can often mean personal bankruptcy.
SOLE PROPRIETORSHIP TAX IMPLICATIONS AND EXPECTATIONS
On the federal side, a sole proprietorship is classified as a “disregarded entity.” This means that the sole proprietor (you) and the sole proprietorship are considered as one. Income from the sole proprietorship is considered the sole proprietor’s personal income. Therefore, the sole proprietor would report their business income (their personal income) on Schedule C of their personal income tax return each year.
If you worked for a company, your employer would deduct Social Security and Medicare taxes from your paycheck before distributing the check to you. As a sole proprietor, however, you do not have any employer or company to deduct these taxes for you. Therefore, the sole proprietor is expected to pay a “self-employment tax” in order to satisfy the Social Security and Medicare tax requirements. This is done through a tax on “net earnings from self-employment.”
One small benefit in Texas is that because a sole proprietor is considered a disregarded entity, you do not need to worry about being subject to the Texas Franchise Tax.
WHAT’S NEXT?
Although a sole proprietorship does not require any exceptional legal work other than maybe filing for some type of permit, depending on what you want to sell, it is still wise to reach out to business law attorneys to help put all your ducks in a row. Your attorney is not there to tell you what to do, but he is there to (1) tell you what is best to do and to (2) guide you so that your legal dream becomes a reality. The honest truth is that a sole proprietorship provides its owners no asset protection and is a dangerous proposition. Even the most basic of planning can provide firewalls to safeguard the business you have built for yourself and your family. A good business law firm, like VLF, can help set up these protections as you begin planning for your future.