Many people start sole proprietorships, or transition their hobbies into a sole proprietorship business. The problem with new sole proprietorships is that many just don't know how to correctly handle the finances associated with them. This tends to lead to all kinds of mistakes. Here are a few of them.
1. Not Understanding that As a Sole Proprietor, You're Solely Responsible
The first thing any sole proprietorship needs to do is learn the rules associated with being a sole proprietor. Many people kind of stumble into sole proprietorship, and never really give a thought to the laws governing that particular type of business entity.
For example, if you were selling your comic book collection piecemeal online, you probably didn't consider it a business. But you keep doing it, and you learn you can add business expenses when you file your taxes.
The second you started selling online, you became a sole proprietor. The second you started claiming business expenses, you became even more responsible for the mistakes of your business.
At the very least, you should take some time out to go over what it means to be a sole proprietorship, and see what kind of filings the IRS expects. Also, look at your local or state government website to figure out if they expect you to register your business or file specific forms as well.
2. Not Setting Aside Money for Taxes
Many small sole proprietors don't realize that they're expected to make quarterly tax payments, not yearly ones. This goes hand-in-hand with mistake number one. If you're not yet generating much money, you're probably okay.
In general, if you estimate that you will owe around $1,000 or more in taxes, then you need to set aside money and remit it to the IRS quarterly. If you're more familiar with how you pay taxes as an employee, then the same rules apply.
If you overpay, you will get a refund. If you don't pay quarterly, you will receive underpayment penalties, even if the IRS owes you a refund.
3. Not Using a Professional Service
Even though a sole proprietorship doesn't count as a separate business entity, you will still need help when it comes dealing with your finances. The largest mistake that you can make is not speaking with a professional about your finances.
A CPA isn't just for corporations or other large businesses. You need an accountant to help you work your numbers and avoid mistakes. They're trained to do it. The rules for businesses change frequently, and every year there's something added or taken away from tax laws.