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hey guys welcome back to the channel recently my youtube channel became monetized and I've been investigating how do I pay taxes on the money I make from Google Adsense which led me to researching sole proprietorship and in today's video we're going to talk about sole proprietorship because I think there's a lot of people out there that are just not familiar with how do you become a business when do you become a business and before we get started I need to tell you I am NOT a lawyer I am NOT a certified personal accountant do your own research talk to your own tax preparing professionals this video is just more for general knowledge it is not legal or financial advice so what is a sole proprietorship and when do you become a sole proprietor and it's very simple I'm gonna ask the question are you doing any activity that generates profit for you generates revenue and if the answer is yes Congrats you're a sole proprietor this is really counterintuitive but in order to become a sole proprietor all you have to do is want to be a sole proprietor no paperwork is required to become one there are no fees or startup costs associated with declaring yourself a sole proprietor and there's no formal process to form it and this feels like a trick this feels like a trap you know when when this was explained to me I'm like that that can't possibly be what the law is why would the IRS or the government's allow this and when you actually think about it it does help to consider it this way people have always been managing businesses or side jobs to earn money that's just what people have always done so the IRS and the government wants to have the lowest possible barrier in order for people to become or start small businesses so if there was literally a fee to register and then some people might never register and the IRS and the government really wants you to register there's lots of people already with babysitting gigs or lawn mowing gigs or dog-walking big gigs and those are really sole proprietorships and the government wants you to report that income they want you to register and say hey declare yourself sole proprietor claim that income and then pay taxes on it the government wants you to pay taxes on the money basically you're already making doing all of these side businesses so by having the threshold to declare yourself a business be literally nothing this is in the government's best interest so real quick let's outline the positives and negatives to declaring yourself a sole proprietor the first one is is that it's simple to understand I literally just explained it to you if you want to be one and you are doing something that generates profits or revenue Congrats you are one and all profits are yours you're a sole proprietor sole meaning just you so everything that you make is yours all decisions are yours there's no board to meet no shareholders to consult you can make any decision with your business that you want there's also no ongoing responsibilities if for example you run a dog-walking business and you don't want to walk dogs this week Congrats you can just take the week off there's also no no continuity necessary if ever you want to just close up shop and say hey I'm not cutting hair or mowing lawns or walking dogs anymore then you're done you don't have to be a sole proprietor anymore you can just discontinue it sole proprietors are also often the first step in order to becoming incorporated or forming a partnership there are lots of other different business and corporate structures that you can form and becoming a sole proprietor is basically like the first step it's the first thing you do before you become a LLC or an S corp or an L Corp and then finally the last benefit is you only file taxes once when you claim profit from a sole proprietorship all profit that you earn goes on your normal tax return so your individual 1040 that you fill out each year you would then add a Schedule C addendum in order to subtract business expenses and then claim profits and then pay taxes on that difference so you're not paying you're not filing separately for your business and you're not paying corporate potentially paying corporate taxes in addition to personal income tax okay now what are the negatives of being a sole proprietor the first one is lack of permanence if you you know die your business technically died as well because you are the sole owner and nothing technically can be legally transferred obviously you you own everything individually as well so you could go through a private process to pass on certain assets but as far as you know legally transferring or selling your company to somebody else you can't do that until you become incorporated because you're a sole proprietor the biggest negative that everyone's going to warn you about is unlimited liability because there is no difference between your business and you you are personally responsible for all company debts and company legal action let's say you know you're walking someone's dog and something unfortunately happens to that dog and you get sued by the owner for for not taking care of their animal you are personally responsible so when you're personally responsible for debts and obligations this means that personal assets your private bank accounts your private property can be used to settle company debts should you be liable and the inverse of this scenario is also true company assets can be seized in order to set personal debt let's say that you're a small business with several employees a lot of people dependent on you and for whatever reason maybe you have a health care emergency or large personal expenses and you become financially in trouble then your company assets can be held can be used in order to settle your personal debt which would be a bad thing if other people were reliant on you and then finally because of this entanglement between your personal and business finances it's really hard to raise capital banks and private investors are not going to trust you with money because you your purse life is inseparable from your business yes you can still get a small personal loan from a bank but as far as really expanding your business no one's gonna give you money for your business until you incorporate a couple more things you need to know about sole proprietorships you should register your fictitious name as a DBA so if I'm Jake's dog walking service or Jake's you know paw Patrol you should register that name with your state's so they know what you're doing and who you're operating ass you might also need to register for a business permit or a license if you want to start a small business as a private electrician or a roofer well obviously there are industry standards that you have to prove that you know so that customers can have some guarantees that your work will be done according to state code so if you're doing any kind of specialty work it might require a permit or license additionally if you make over $1,000 a year the IRS requires you to make quarterly payments in addition to your annual income at the end of the year so if once again it's over $1,000 you have to go on the IRS a--'s website register your sole proprietorship and then start setting aside money I don't know exactly how this process works because I haven't done it for my youtube channel yet but I'm gonna go on the website soon and then figure out how do I start putting money aside in order to avoid interest and penalties if you pay nothing the entire year when you do your annual income tax form at the end of the year the IRS is going to say hey you didn't set any money aside we're going to charge you interest on what you didn't set aside and you might have to pay some kind of fine so how much should you be setting aside well you should expect your tax bill to be between 25% and 35% of what you're making why this is is because you have to pay what is called the self-employment tax everybody who works for another company you get a w-2 form and you pay FICA taxes FICA taxes are like seventeen point six or seven or seven seven point six percent or something like that that is Social Security and Medicare and you pay that personally out of your check but then your employer with company money has to match that when you're self-employed you have to pay both sides both the employee and the employer tax for Social Security and Medicare so that's 15 point three and then you'd have to treat the rest of it basically as normal income on top of potentially what other jobs you might have so you could end up falling in like the twenty two percent or twenty four percent tax income brackets twenty-two plus fifteen is about twenty seven percent could be higher could be lower if you don't have another job if this is the only thing you do and you don't make that much then it could be lower additionally once you've established yourself as a sole proprietor you might want to eventually incorporate yourself and form a LLC a limited liability corporation in order for asset protection what this means is that your your personal finances and your business finances will legally finally be separated when you incorporate and become an LLC now to become an LLC it does require paying an annual fee and you have to register with the states and then file separate tax returns one for your company one for yourself there's also ways to save money on taxes when you become an LLC basically choose the tax structure of an S corp you can save on employment taxes I'll probably make a separate video doing an example how to save money on S corp LLC taxes but for this video I think we covered enough with sole proprietorships if you have any questions leave me one down below I'm still learning all the ins and out if you know more than I do definitely jump in and then help out with the comments section and if you enjoyed this video give it a thumbs up so the algorithm knows it's good if you haven't already subscribed my channel consider subscribing I post weekly about military and Finance topics and I do plan on making a couple more videos in the future about small businesses and taxes because I think this is really good information to know ok guys until the next video take care