A sole proprietorship is a simple and convenient way to start a small business.
Since the business and the business owner are legally and financially inseparable, the requirements for launching a sole proprietorship are relatively negligible, at least compared to the requirements involved with launching a partnership or corporation.
Yet because the company and its owner are so closely associated in a sole proprietorship, there has been some confusion about business functions that are normally taken for granted. For example, some entrepreneurs mistakenly believe that sole proprietorships are unable to hire employees.
A sole proprietorship is really just a term to describe the way the business is organized. It doesn't necessarily describe the operation of the business as one individual (i.e. the owner) doing all the work. It is highly common for sole proprietorships to hire other individuals to help carry the company's workload.
Like any other business, there are no limitations to the number of employees a sole proprietorship can hire. Sole proprietor employees can be direct hires or independent contractors that have been hired for a specific job or time period.
If you are a sole proprietorship interested in hiring employees, there are a few other things you will need to consider.
- Employer Identification Number (EIN). If your sole proprietorship hires other people you will need to apply for an Employer Identification Number with the IRS. The application process takes just a couple of minutes and it can be done online at the IRS website.
- Payroll considerations. As a sole proprietor, your business income and expenses are reported on your personal tax return. It's likely that you'll also be required to pay quarterly estimated tax payments. But once you bring on an employee, you will have other payroll-related issues to deal with. If you aren't capable of handling them yourself, be prepared to hire a payroll service provider.
- Year-end reporting. As a small-business employer, you'll also be required to do year-end reporting related to your employees. The IRS requires all businesses to complete W2 forms for their workers and to submit them to the IRS on a timely basis.