A Sole Proprietor is a small business owned and run by a single person. This person has not separated themself legally from the business, and is personally responsible for all its debts. If the small business is sued, that person can lose their car or house. On the plus side, a sole proprietorship is unbelievably simple to set up.
People doing “side work” are, by default, Sole Proprietors. You don’t need to file any paperwork to start a sole proprietorship – the simple act of being in business means you have one. Any consulting, moonlighting direct to customers, or other side income should be declared on the IRS form called Schedule C when doing your annual taxes.
Examples of typical small businesses include – someone with an office job who does catering on the side, the guy who plows driveways in the winter for extra cash, the homemaker who cleans two houses once a week for some spending money, the college student who does graphic design for local bands, and the IT expert who will fix people’s computers for an hourly rate.
Even though most people don’t think of these small random transactions a few times a year as a proper business, they are by default sole proprietors. Creating money handling procedures and a simple record keeping system will actually make their financial life simpler, not more complicated.
An important question is – did you actually make any money from this side work? Did the snowplow operator spend so much money on the extra equipment, his time, gas, tires and wear and tear on his truck that income from a few customers doesn’t pay for all the extra costs? Did the person catering a few events use so much of their own spices and condiments that the money earned didn’t pay for the actual food costs?
Figuring out if you made a profit or not has uses beyond the simple capitalist goal of tracking profit. Profit is also an indicator of whether your business model (what you offer in exchange for money) will last over time.
1. If you are not making a profit, then ask “why”? Should you raise your rates? Find more customers? Cut your costs? (What *are* your real costs?)
2. You declare your *profit* as income on the tax return, not what you actually earned. Knowing what you can deduct as an expense lowers your profit. It also lowers your taxes (legally!).
So, even when it is “just you”, being able to separately track your small business income and expenses gives you a better understanding of your own small business and your business success.