Hiring employees as a sole proprietor | DiMercurio Advisors

Yes. But don’t stop reading, there’s more to it than that.

A sole proprietorship, the most common form of business ownership in the United States, is a business structure in which one person is the full owner, without a legal distinction between their finances and that of the business itself. You don’t even have to register! If you’re running a business, and you haven’t filed any paperwork about it, you’re a sole proprietor.

But what about employees? Can you hire people to help with your business, and still remain classified as a sole proprietorship?

The answer is: yes! But don’t click that back button yet. There are a few things you ought to know about before you make the decision to take on employees as a sole proprietor.

How do I hire my first employees?

Before we get into the details, let’s cover the basic steps of hiring employees for your small business.

1. Apply for an EIN. You need an Employer Identification Number to hire employees. Don’t worry, it’s free to file an application for an EIN with the IRS.
2. Budget for the role. You need to make sure you can actually afford to pay an employee. Remember, besides their salary or hourly rate, you need to consider benefits, payroll taxes, and insurance as well.
3. Invest in payroll software. Technically, you can run payroll yourself, but that’s not a great idea. Focus on running your business, not IRS forms and tax deadlines. We recommend Gusto.
4. Learn how to use your payroll software. Not everything about payroll can be automated. You’ll still need to know how to grant PTO requests or approve reimbursements. And make sure you follow the directions while you’re setting it up!
5. Report your new hire to your state. The state Department of Revenue needs to know about your new employee. Payroll software might even be able to do this on your behalf, but you should still double check.
6. Register for reemployment tax. In Florida, all businesses with employees need to pay reemployment tax.
7. Get worker’s comp and other insurance. Worker’s compensation may or may not be legally required but might be a good idea either way. Ask your business attorney. But you absolutely do need liability insurance no matter what.

Those are the basic steps to hiring an employee but working with tax and accounting experts to guide you through the process might save you time and legal trouble.

Speaking of legal trouble ...

Is it a good idea to hire employees as a sole proprietor?

The quick answer is probably not.

As a sole proprietor, there’s no legal distinction between your assets and those of the business. In many ways, legally you are the business. That means you have unlimited personal liability for any debts or lawsuits your business might incur, and if things go far enough sideways, your personal assets like your house or car could be at risk.

Now add employees into the equation. Do you really want to be directly, personally responsible for anything they might do while on the clock?

The most basic form of defense for your personal assets is a Limited Liability Company or LLC. As the name implies, it’s a business structure that limits the amount of personal liability you carry for what happens with the business. It does this by establishing a separate legal entity – the LLC itself – that draws a distinction between you and your business.

That way, if your employee spills some hot coffee on a sweet old lady, it’s the LLC getting sued and not you personally.

What are my options for structuring my business?

Your business is formed from the combination of two things: legal structure and tax structure. Those two qualities define much of how your business operates.

Tax structure

Unsurprisingly, the tax structure of your business determines how you’ll pay taxes. It’s related to the legal structure, but not the same thing. Two different corporations, for instance, might elect to file taxes in different ways.

Keep in mind that not every type of tax election is available to every type of legal structure.

Legal structure

The legal structure affects the ownership, the responsibilities, and the day-to-day operations of your business. The most common forms are sole proprietorship, partnership, corporation, and LLC.

Please note that while terms like sole proprietorship and partnership describe both legal and tax structures, they mean slightly different things in each context, and they don’t always have to match.

LLC advantages

We typically recommend the use of LLCs for most businesses. They’re an efficient way of establishing a baseline of legal protection and allow for maximum tax flexibility, which lets your CPA work magic and save you money on your tax return.

Here’s how your LLC can be taxed:

• As a sole proprietorship: One owner only, taxed through their individual tax return, not subject to corporate taxes. Also known as a “single member LLC” or disregarded entity.
• As a partnership: Two or more owners, taxed through their individual tax returns, not subject to corporate taxes. Like a sole proprietorship with two owners splitting revenue.
• As an S-corporation: One or more owners, not subject to corporate taxes. Can save money on your taxes once your business reaches a certain size.
• As a C-corporation: One or more owners, subject to corporate taxes. Not typically recommended as it’s overkill for the majority of businesses.

Bottom line

So, can sole proprietors hire employees?

Technically yes, you’re allowed to do that, but why take that risk? Some form of liability protection (like an LLC) is a very good idea before you have any employees acting on your behalf that you could be held responsible for.

The only upside of running a business as a sole proprietorship is the ease, simplicity, and lack of paperwork. All of that goes out the window when you start applying for EIN numbers and registering for payroll taxes, so at that point, establishing an LLC for your business is just a better idea.

Not looking forward to the extra paperwork of creating a legal business entity, protecting yourself, and hiring employees? Give us a call! The tax and accounting experts at DiMercurio Advisors will get you started with minimum stress.