Per Diem Rates from the U.S. General Services Administration
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Rates are set by fiscal year, effective October 1 each year. Find current rates in the continental United States ("CONUS Rates").
What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business, owned by one person. From a legal standpoint, the owner and the business are considered one and the same. The implication of this is that both your business and personal assets are at risk should you be sued.
Corporations:
In contrast, a corporation and its owners (stockholders) are separate legal entities. Stockholders enjoy limited liability. This means, their personal assets are insulated from legal claims brought against the corporation.
Limited Liability Companies (LLCs)
LLCs enjoy the same limited liability protection as shareholders of a corporation without having to incorporate.
Licensing Requirements
There are no IRS licensing requirements for sole proprietorships. However, for state and local purposes, you may need a business license. If you sell merchandise at retail you'll need a state/local sales tax permit.
If you use a fictitious business name, for example, Jack Plummer doing business as (dba) Sludge Plumbing Service, you may need to register it with your secretary of state or with the county. Check with your state, county, and local tax agencies.
Tax Identification Numbers
If any one of the following apply, a federal employer identification number is required:
- The sole proprietor has one or more employees
- Has a qualified retirement plan
- Files returns for excise taxes, alcohol, tobacco, or fire arms taxes
If none of the above apply, you can use your social security number for tax reporting.
TIP:
With the rise of identity theft, consider applying for a federal employer identification number even if you're not required to get one. If you hire an independent contractor and issue a 1099, you must include you tax identification number on this form. If you don't have an EIN, you'll have to include your social security number. The person you hire will likely be a stranger, so it would be wise to take precautions.
If you have employees, you'll need a State Withholding Number for income tax withholding purposes and a State Account Number for state unemployment tax reporting. Certain states have no personal income tax. Check your state's requirements.
Taking Money Out of Your Sole Proprietorship
Withdrawals of cash or property out of your sole proprietorship for personal use are called draws. A draw is not and expense; it is not deductible. You should set up a drawing account in your books to keep track of your withdrawals.
Draws used for business purposes:
If you take cash out of your business and use it for business purposes, get receipts to support your deductions and to use as a basis for recording the amount such expenses in your books.
Tax Status of a Sole Proprietor
As the owner of a sole proprietorship you're not considered an employee of your own business. This means you don't receive a paycheck or W-2 Form or have any employment taxes withheld from any withdrawals of cash (draws) you take out of the business.
Estimated Taxes
Since no taxes are withheld from your self-employment income, you'll need to make quarterly estimated tax payments (Form 1040-ES) to cover both federal income taxes and self-employment taxes.