Sole Proprietorship and Taxes

November 21st, 2008
  • I am currently employed full-time by a company and make ~100k per year. My state of residence is Minnesota. In addition to my full-time job, I am interested in consulting during the evenings and weekends. For my consulting work, I will be invoicing my clients on a monthly basis and I expect to receive a 1099 form each year from my clients. The consulting I will be performing is analysis driven and I am not too concerned about liability. For the first year, I only expect to make between 6k-10k. Here are my questions: 1) Is it necessary for me to set up a Sole Proprietorship? What are the advantages/disadvantages of setting up a Sole Proprietorship? 2) How do I go about setting up a Sole Proprietorship in Minnesota? A link to an online form would be great! 3) Would you recommend an LLC vs. a Sole Proprietorship? I would like to keep expenses down and I am not too concerned about liabilities due to the nature of my work. 4) I would like to offset most of my income from my consulting work. What deductions are legal for my consulting business. A link would be great. Thanks for you help. Tim


  • Hello and thank you for your question. 1) Is it necessary for you to set up a Sole Proprietorship? What are the advantages/disadvantages of setting up a Sole Proprietorship? As the comment below correctly notes, you don't have to set up a sole proprietorship; just do business under your own name (or an assumed name/tradename) and you've done it. You'll report all income and expenses on your personal income tax return, Form 1040. The alternative to a sole proprietorship would be to form a limited liability company (LLC) with yourself as 100% owner. The only advantage of doing this is to protect assets in some cases if you are sued. Taxwise the treatment is exactly the same, with all income and expenses reported on your personal income tax return, because the IRS considers a wholly owned LLC as a "disregarded entity." Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation http://www.irs.gov/faqs/faq12-1.html 2) How do I go about setting up a Sole Proprietorship in Minnesota? Really there's nothing you need to do if you're using your personal name. "In Minnesota, single member LLCs have been allowed since August 1, 1997. The fee [in 2002; perhaps it's gone up] for organizing an LLC in Minnesota is $135. You can get a free copy of the Articles of Organization form and other information by calling the Minnesota Secretary of State's office at (612) 296-2803." http://www.gwcartercpa.com/llc.htm 3) Would you recommend an LLC vs. a Sole Proprietorship? I would like to keep expenses down and I am not too concerned about liabilities due to the nature of my work. If you don't care about liability, and you're not planning to take in any business partners, you don't need to form an LLC. Again, the tax treatment is the same either way. 4) I would like to offset most of my income from my consulting work. What deductions are legal for my consulting business. Here's an IRS list of business deductions: http://www.irs.gov/businesses/small/article/0,,id=109807,00.html If you plan to use excess deductions to shelter your regular income, you'll have to be ready to show that your business is legitimately entered into for profit (since obviously it will be running at a loss if expenses exceed income). Is It A Business of a Hobby? http://www.irs.gov/businesses/small/article/0,,id=99239,00.html Search terms used: llc "disregarded entity" minnesota "disregarded entity" site:irs.gov deductible expenses Thanks for letting us help, and good luck in your venture Google Answers Researcher Richard-ga


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