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Sole Proprietorships in New York 

In the past, we’ve discussed “entity selection” in several different contexts. Entity selection is a process to determine which entity best suits a given situation for tax and liability purposes. Numerous factors contribute to this determination including, but not limited to, the number of shareholders and location. C corporations, for instance, face double taxation.  That’s because they are subject to tax at both the entity level and the individual shareholder level.  S corporations, on the other hand, are pass-through entities.  As a result, there’s a taxable event when there’s a distribution to shareholders.  Unlike C corporations, S corporations also have a shareholder maximum.

What’s The Importance of Entity Selection?

There are plenty of other differences between the various possible business entities.  Each can influence the entity formation consideration process. A sole proprietorship is the simplest type of business entity.  This type of entity faces different tax implications depending on the state . As we’ll see, the requirements and tax implications faced by a sole proprietorship in New York are fairly straightforward.  They are also consistent with those in most other states. There are several important rules, however, which pertain to sole proprietorships in New York State.  In consequence, New York taxpayers need to be careful to observe these rules if they apply to their individual situation. 

Basics of Sole Proprietorships

Simply put, a sole proprietorship is a business entity which is not distinct from its owner for liability and tax purposes. A sole proprietorship is not a separate legal entity distinct from its owner.  In certain cases, the creation of a sole proprietorship does not require any documentation with the state. Whenever a person earns income without the help of a preexisting business entity, a sole proprietorship is automatically established.  Accordingly, you’re automatically considered a sole proprietor if you run a business yourself.  That is, if you sell goods or provide a service in exchange for a fee.

Like S corporations, partnerships and LLCs taxed as partnerships, sole proprietorships are pass-through entities.  All of the income generated from the sole proprietorship flows through to the individual owner.  The proprietor reports the income on Schedule C of his or her personal income tax return. If a person earns $100,000 through a sole proprietorship, this business income will fall into the same tax bracket as if it was wages.  Sole proprietors are responsible for keeping track of their own tax obligations.  That includes the obligation to contribute to social security and medicare.  This obligation is commonly referred to as “self-employment tax”. That’s because it is normally faced jointly by employees and their employers. 

Sole Proprietorships in New York

Individuals who create sole proprietorships in New York face different requirements depending on it’s establishment and operation. If a sole proprietor chooses to use his or her name as the business name, then there is no need to file a business name with the county clerk. If, however, the individual decides to use a fictitious or separate name for the business, then that individual must first check to see if the proposed business name is available New York.  That individual must then file a notice with the county where the business conducts its activities.  A filing fee must also be paid.  The size of the fee varies depending on the county, as well as the number of counties filed in. 

If the sole proprietor decides to hire employees, then the owner must obtain a unique employer identification number (EIN).  n EIN is a nine digit number issued by the Internal Revenue Service. Its designed to help the IRS keep track of businesses throughout the country. If the sole proprietorship hires employees, then the business must report all income and wages using this unique number.  Business owners can obtain an EIN online through the IRS’s website.  

Special Circumstances

Depending on the business activities of the sole proprietorship, the owner may have other requirements to operate.  For instance, the owner may need to obtain special licenses, clearances or permits. New York taxpayers can visit a variety of web-based resources to determine which licenses and permits, if any, they need.  For instance, if an individual wishes to engage in building or development activities, then he or she may first need to obtain special zoning permits. The difficulty and costs involved with obtaining licenses and permits depends on the specifics of the business. 

Call A New York City Tax Attorney For Help

These are just a few of the considerations and issues pertaining to sole proprietorships in New York.  If you want to establish your own sole proprietorship, you should conduct basic research on what’s involved based on the specifics of your situation. Studying the subtle differences between business entities, though, isn’t usually a favorite pastime for most people.  That’s precisely why potential clients seek advice from Mackay, Caswell & Callahan, P.C.

Our business and tax attorneys have put in the time and sweat equity required to master the legal nuances of business formation.  Those nuances can have a great impact on your future, so if you have a tax or business issue consider contacting us.  One of our New York City tax attorneys can help you, today. Gov us a call!

Image credit: Marco Nürnberger