No type of business entity is easier to form in New York than a sole proprietorship. Anyone can set one up in a very short time. It is also a very simple business to operate because, essentially, a sole proprietor has full responsibility for their business decisions and bears full responsibility for its obligations. It's a good idea to get an overview of sole proprietorship rules in New York before jumping in.
What Is a Sole Proprietorship?
A sole proprietorship is a business with just one owner. That owner makes all the business decisions, has total control over the profits, and is responsible for all the debts and obligations of the company.
Both federal and New York state taxing authorities ignore the business structure and treat income and debts of a sole proprietorship as belonging to the owner themselves. That means that all profits are taxed at the individual tax rate as part of the owner's individual tax return.
It also means that sole proprietorships pay a 15.3 percent tax rate for self-employed individuals to cover Social Security and Medicare benefits.
Sole Proprietorship Debts
Just as all income from a sole proprietorship belongs to the owner, expenses and debts belong to the owner as well. That means that a sole proprietor in New York can write off expenses from their taxable income.
For example, they can write off fuel expenses, operation expenses and other costs they pay to operate the business. These tax write-offs are excellent ways to lower the total amount of tax owed on their personal income tax return.
Personal Liability for the Owner
However, if a sole proprietorship does not pay its debts, the creditor can sue the owner personally. This is one of the primary differences between a sole proprietorship and a limited liability company (LLC).
The LLC business form in New York (as in all other states) limits the personal liability of the owners, termed members. If the LLC does not pay its debts it is generally not possible for creditors to sue the members of the business personally.
Forming a New York Sole Proprietorship
One of the big advantages to choosing sole proprietorship as a business entity in New York state is how easy it is to set it up. The state does not require any type of filing or registration for those who open a sole proprietorship under their own name. For example, if Jan Jones does business as "Jan Jones," no registration is required. This makes forming a sole proprietorship relatively simple and inexpensive.
On the other hand, though New York does not require licensing to form a sole proprietorship, the owner must comply with any licensing regulations that govern the specific type of business. For example, Jan Jones cannot do business as an attorney unless they are a member of the state bar. This is also true of other business professionals such as doctors, accountants and dentists.
Sole proprietors must quality for their profession, including obtaining licensing if required, before opening their business. Licensing does not occur just at the state level, but can also be governed by city regulations. For example, in New York City, the municipal Department of Consumer Affairs licenses many types of small businesses, including licenses to operate newsstands on public sidewalks.
Tax Registration for Sole Proprietorships
The fact that sole proprietors generally do not require a state license doesn't mean that they don't need to register for tax matters. Generally, if the business includes selling taxable personal property, renting property, or resale of tangible personal property, the owner must apply for a Certificate of Authority to collect sales and use tax.
Sole proprietors should contact the New York Department of Taxation and Finance to apply. They need to provide the agency with information about the business and its activities, as well as identify themselves and provide contact information. Once the NYDTF grants the Certificate of Authority, the owner must display it in their place of business.
Extra Steps if Fictitious Business Name
New York state allows sole proprietors to conduct business under their own name without registering or obtaining a business license. But what if they decide to use an assumed name or a trade name ? There are extra steps "Jan Jones" must take to do business under an assumed name, largely to make sure that their true identity is available to their clients.
In this case, the proprietor must file a Certificate of Assumed Name with the county clerk's office in the borough in which the business is located, and this includes submitting a filing fee. Registering the DBA is required so that members of the public can find out who they are doing business with.
This is important for sole proprietorships since the owners assume unlimited liability for their businesses, and this is useful only when members of the public can figure out the true owner of a business operating under an assumed name.
Extra Steps for Business With Employees
If a sole proprietorship decides to hire an employee – or several – they must obtain an employer's identification number from the IRS. More commonly called an EIN, this nine-digit number must be used to report wages for tax purposes when there are employee wages to report.
Note that this is the big difference between operating as a freelancer and operating as a sole proprietorship: a freelancer does not have the right to hire employees.
Getting an EIN is not difficult. Anyone can apply for one online through the Internal Revenue Service website. Any business owner without employees just uses their own Social Security number to file taxes. But sometimes banks won't allow a sole proprietor to open a business bank account unless they have an EIN.
- NY City Bar: Sole Proprietorships and Partnerships
- New York.gov: Start Business New York
- New York Chamber of Commerce: Sole Proprietorship New York
- New York State: New York Source Income—Sole Proprietorships and Partnerships
- NYC: Business Certificate for Sole Proprietorships and General Partnerships
Teo Spengler earned a J.D. from U.C. Berkeley's Boalt Hall. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an M.A. and an M.F.A in creative writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.