Aside from the dream of making a profit, fulfilling some personal dreams and employing yourself and others in a worthwhile fun endeavor, have you ever considered starting a sole proprietorship to partake in the tax benefits conferred on businesses?
I've been doing some preliminary investigation about Starting a Business, gathering information from the IRS and Small Business Administration.
Is it a Business or a Hobby?
In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
1. You carry on the activity in a business-like manner,
2. The time and effort you put into the activity indicate you intend to make it profitable,
3. You depend on income from the activity for your livelihood,
4. Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
5. You change your methods of operation in an attempt to improve profitability,
6. You, or your advisors, have the knowledge needed to carry on the activity as a successful business,
7. You were successful in making a profit in similar activities in the past,
8. The activity makes a profit in some years and the amount of profit it makes, and
9. You can expect to make a future profit from the appreciation of the assets used in the activity.
Sole Proprietorships
A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return.
Checklist for Starting a Business
Most businesses start out small. The checklist below provides the basic steps you should follow to start a business. The list should not be construed as all-inclusive. Other steps may be appropriate for your specific type of business. Refer also to the Small Business Administration's Checklist for Going into Business (PDF).
* Apply for an Employer Identification Number (EIN) if applicable (not applicable unless you have employees, pay medicare etc.).
* Select a business structure. (I'm choosing sole proprietorship to start, because it the simplest and meets my needs)
* Choose a tax year. (calendar year or fiscal year)
* Choose your accounting method. (you need to keep track of, and record, income and expenses)
* If you have employees have them fill out Form I-9 and Form W-4. If your employees qualify they must give you a completed Form W-5.
* Pay your business taxes. (Income, Self-Employment, Employment and Excise Taxes)
More Resources
Publication 587 (2004), Business Use of Your Home
Publication 535 (2004), Business Expenses
Publication 583 (12/2003), Starting a Business and Keeping Records
Small Business Administration
Small Business Administration - Startup Basics
SBA Checklist for Starting a Small Business
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