A sole proprietorship is the simplest form of business. Anyone who sells any services and they are their bosses themselves – then they qualify as Sole Proprietor. People often ask, “Can a sole proprietor have employees?”, the answer is simply – YES!
Any business can have Employees, and a Sole proprietor is a standalone business. Before you ask the question of “can a sole proprietor have employees?” it is best that you know what sole proprietor means.
Sole proprietors often start alone by providing services to other clients as self-employed and then become self-employed businesses employed by one person. With time, some of them begin to get a considerable number of orders which requires them to start hiring other people or refuse their clients (Which surely no one wants to do!).
So if someone asks you the question, “Can a sole proprietor have employees?” then you say to them, “Yes!” but you also need to guide them regarding possible liabilities they must be prepared to handle. To learn about what you need to do to hire employees as a sole proprietor, just keep on reading!
Before getting into details of “Can a sole proprietor have employees?”, let us learn something about sole proprietorship itself.
Table of Contents
- Sole Proprietorship Meaning
- Can A Sole Proprietor Have Employees?
- Sole Proprietorship Vs Self-Employed
- Advantages And Disadvantages
- How To Start A Sole Proprietorship?
Sole Proprietorship Meaning
To better understand “can a sole proprietor have employees?” it is best to know what it means.
A sole proprietorship meaning is simply a business that one person operates. That one person is the boss as well as the employee, so they are self-employed. When a person starts a business without any partner or employee, that business is essentially a sole proprietorship. However, the business and personal assets have no separation, and therefore, you will be legally liable directly for any legal issues incurred by your business.
In addition, you will be personally responsible for business liabilities. Accordingly, all your business income needs to be declared under Schedule C of form 1040. Hopefully, sole proprietorship meaning is clear!
Now, let’s get back to the question, “Can a sole proprietor have employees?”
Can A Sole Proprietor Have Employees?
The simple answer to the question “can a sole proprietor have employees?” is Yes, but you need to take some steps to protect yourself from liabilities.
So before you start asking questions about “can a sole proprietor have employees?” you should know how to protect yourself and what incentives you will get starting a sole trader business.
Step 1: Get An EIN
Employer Identification Number is a prerequisite for any business, including sole proprietorship, to hire employees. You can apply for an EIN by online application, fax, or mail. You will be registered as an Employer with the Internal Revenue Service (IRS).
EIN has the same role for businesses as that of Social Security Number for any citizen. This will be used to hire as well as filing taxes.
Step 2: Change Your Business Structure
If you are hiring employees while remaining a sole proprietorship, then it can put you at considerable legal risk. For instance, your employees can sue you over something, and the legal proceeding won’t happen against the company but you directly, which will put your assets at risk.
In addition, your employee’s fault may result in a scenario where your client may file a lawsuit, and again, you will be legally liable directly for any outcomes. If you change your business structure and choose a different type of business entity other than a sole proprietorship, like the Limited Liability Company (commonly referred to as the LLC), then your business and personal assets will be separated, and any legal proceedings against the company won’t affect you directly. In addition, you will get to take advantage of many corporate benefits as well!
Step 3: State Labor Department Registration
For you to be able to pay state unemployment compensation taxes, you need to register with the Labor Department of your state (i.e., Florida Department of Economic Opportunity).
Step 4: Secure Insurance
You are legally liable to pay for medical bills and compensation for any employee who gets injured while on the job. Therefore, it is very important to get insurance for your employees in case such a need occurs you won’t have to worry about facing financial liabilities. In some states, you may be allowed to not have employee insurance until you hire employees greater than a certain number but still, it is better to protect yourself early on.
Step 5: Tax Withdrawals And Payroll Setup
You need to set up an automated tax withdrawal system that will deduct employee’s salary tax and transfer the tax payments to the IRS automatically. This will allow you to avoid fines and penalties due to errors in paying taxes. In addition, you also need to pay social security and Medicare taxes.
Step 6: Employment Forms
You need to fill Form I-9 for the USCIS and Form W-4 for the IRS for every new employee you hire. So it can involve lots of paperwork. You need to be prepared to do all this paperwork.
Finally, We advise you to consult an attorney to make sure that you don’t violate any Employment laws. Violating federal laws may result in heavy fines, and these can be very damaging to a self proprietorship business as most of the time, these are small-scale businesses, and huge fines can potentially bankrupt as well.
Hopefully, We have answered, “Can a self proprietorship have employees?”. Now, if someone asks you, ‘Can a self proprietorship have employees?’, then guide them based on the information provided here.
So let’s dive into Sole proprietorship itself.
Sole Proprietorship Vs Self-Employed
Two terms are very much linked to the other. A Self-Employed person is said to be running a Sole Proprietorship Business. You are Self-Employed if you are providing services to clients and you don’t have a commitment to any company like that of a job. People often ask, “What is the difference between Sole Proprietorship vs. Self-Employed?” So you can answer them, there is no need to compare Sole Proprietorship vs. Self-Employed because both things are intertwined.
Advantages And Disadvantages
Sole Proprietorship Advantages
Here are some of the Sole Proprietorship Advantages:
1. Lower Registration Fees
One of the top Sole Proprietorship advantages is that you can start your business registration with very few initial business registration costs. You don’t have to pay recurring yearly fees for your business like LLCs and other business entities. With that being said, you can save up a good amount of money on a yearly basis; along with that, you won’t have to hire accountants to file your taxes as well.
2. Simple Business Structure
In Sole Proprietorship, you can have total control over all finances and decisions involved in the business functionality as you will be the sole owner of the business. Like LLC or Corporation, you don’t have to worry about managing other roles such as registered agents or company officers. In addition, you won’t have to worry about boards, officers, or other positions, allowing you to focus on daily operations and business growth.
3. Simpler Banking Procedure
You can use your bank account to make and receive payments, and you don’t have to create a separate business account to manage payments. In an LLC or Corporation, a separate business bank account needs to be created. However, you may as well create a separate account to separate personal and business finances.
4. Less Complicated Tax Procedure
Other businesses need to apply for an Employer Identification Number to hire employees, whereas sole proprietors do not need to apply for it. As a sole proprietor, you can use your social security number for this purpose. However, you can apply for an EIN if you choose to use an EIN.
5. Less Documentation Is Required To Start
You don’t have to fill a ton of paperwork to start your business as a sole proprietorship. You become a sole proprietorship business simply by doing business; you don’t have to apply for a lot of permits and licenses. However, you should always check the requirements of your State and apply for a permit if needed.
Now, we shall have a look at the other side of the coin.
Sole Proprietorship Disadvantages
Sometimes the question isn’t “Can a self proprietorship have employees?” but it is “Should a self proprietorship have employees” or “Should you register as a self proprietorship.” If this business structure comes with its advantages, then surely there are going to be some disadvantages as well. Here are some of them:
1. No Liability Protection
When a person is starting their business for the first time, they don’t think of courts and legal proceedings, but one thing you should be certain of is that someday some time you are going to get sued. If you remain a sole proprietorship for a long time, then the chances of a case being filed against you by a customer or an employee only increase. So we would suggest you surely change to another business structure once your business has started to make some money and you have hired more than two people. If a case is filed against a sole proprietorship, then the sole proprietor becomes directly involved; therefore, your assets have a big threat in direct legal proceedings.
2. It Is Harder To Flip Your Business
If your business is a sole proprietorship, then simply you cannot sell it to someone easily when compared to LLC or Corporation. You can sell your business by selling the business assets, which would surely not allow you to get the true value of your business. So don’t go for Sole Proprietorship if you plan to sell your business.
3. It Is Difficult To Get Investment Or financing
First and foremost, if you want investment and financing, it is near impossible to get it as a Sole Proprietorship. The reason being due to this business not allowing for roles of investors and partners; you simply cannot sell the business equity. In addition, if you get loans from a Bank as a sole proprietor, then you will have to put your own assets as collateral, and it would be very easy for Banks to seize your assets if you default on the loans. On the other hand, if an LLC defaults, then only company assets will be seized, and the Bank will have quite a difficulty in getting directly to you.
So “Can A Sole Proprietor Have Employees?” is less of a worry when compared to “Should a Sole Proprietor Have Employees?”
Now, let’s look at the process of starting a sole proprietorship since you’re here asking about “can a sole proprietor have employees?”.
How To Start A Sole Proprietorship?
The answer to the question “How to start a Sole Proprietorship?” is fairly straightforward.
You first of all need to decide your business name, and then, you shall decide on the location of your business. Then, you may have to apply for a business license with your state or city and get permission to operate your business from home. Then you can create a business checking account to separate your business finances from personal finances.
However, you do have the option to use your personal bank account for handling payments and business finances. In addition to these initial steps, you may have to take some more steps. If you are going to sell taxable products in your business, then you need to register for sales tax with the taxing authority of your state. If you want to hire employees, then you need to apply for EIN as well.
Hopefully, you have found the answer to the question “How to start a Sole Proprietorship?”
Now, let us discover more about “Can A Sole Proprietor Have Employees?”. We surely know the answer and the subsequent process, but how about a person decides to hire their family members as a Sole Proprietor? In that case, would the answer to the question “Can A Sole Proprietor Have Employees?” be any different, let’s see that!
Can You Hire Your spouse?
When hiring your spouse to work in your Sole proprietorship, you can save a lot of taxes as well as unemployment benefits. You don’t have to pay federal unemployment taxes (FUTA tax) with your spouse. In addition, you can save on other benefits such as food and lodging expenses, life insurances, and transportation costs. So obviously, there are benefits to hiring your spouse but do not hire them if they do not do the work of a legitimate employee to save up when filing taxes.
In the end, we would like to highlight that along with the question “Can A Sole Proprietor Have Employees?”, we often get the question “What is a proprietor?”. Well, simply if someone asks you the question “What is a proprietor?” then you can tell them that a proprietor is an owner of a business or property or any other thing.
Hopefully, we have cleared your mind regarding “Can A Sole Proprietor Have Employees?” as well as “What is a proprietor?”