For some, the road to becoming a contractor is very intentional, with years of preparing for exams and pursuing apprenticeships.
Others start with small personal projects or side gigs and soon create a full-blown business with minimal effort of planning involved.
This unexpected turn of events means that you can rapidly turn your skills into a legitimate business, so long as you follow the basic business start-up requirements.
Every time you provide a service for an amount of money, you must comply with government and industry rules. Taking on even the smallest amount of contracting work means you must qualify as an official business.
Read on for a comprehensive guide to the ins and outs of business qualifications and registration for contractors.
What is a Sole Proprietor?
The line between a sole proprietor and operating as a business might feel a little blurry. For tax and legal reasons, you must figure out which you are.
The IRS defines a sole proprietorship as someone who owns an unincorporated business by himself or herself. Sole proprietorships do not require federal registration to operate, and the owner is personally liable for the business’s debts.
Sole Proprietor Vs. Establishing a Business
When it comes to contracting, setting up a business entity so that you can operate your career legitimately has many long-term financial benefits.
Not only can you take money out of the business whenever you please, but the profits are also yours alone to keep and process. You can decide to reinvest any of these profits back into your business or take out loans to reap more money to put in.
When it comes to filing taxes, the financial power is again in your sole hands as the business entity owner. You can even choose to deduct expenses from your business’ taxes that you would not be able to deduct for personal ones, such as transportation costs, home business charges, and depreciation on any equipment or property.
Of course, complete ownership also means that all of the losses are also yours to grapple with, as well. You also have to budget to pay for your health benefits, social security tax, and medicare, as though you are your own employee.
Do I Need a Business License to Be a Contractor?
Most US states will require you to choose between operating as a sole proprietor or as a business entity. If you wish to receive payment, advertise, pay taxes, or operate as a business entity, you will need to register your business in each state you wish to operate in. When you apply to obtain your contractor's license in each state, you will apply as your business entity with yourself, a full time employee, or any member of responsible management for the business as a qualifier.
How Do You Get a Business License?.
The trickiest part is figuring out what type of business best fits your contracting needs. You’ll have to make this decision when it comes to filing your first income tax as a business and completing the Schedule C form for your tax return.
If you are both the owner and the sole worker, forming a limited liability company or a single-member LLC makes the most sense. However, if you plan to sell products, hire other employees or run a full-fledged professional practice, you should form a corporation or one of the partnership types. You should always consult an attorney and CPA to determine the best way to register your business.
Once the business type is taken care of, all that remains is for you to file for a tax ID number, register your company name, and set up a business bank account and bookkeeping system. Keep in mind that these steps can take some time, so make sure to plan before you start taking on paid work.
What Are the Consequences of Operating Without a Business License?
Operating without a business license is never a good idea.
You’ll likely face financial charges and potentially some other punitive measures no matter what.
The most likely scenario is that you’ll be charged fines, back taxes, and fees from state and federal authorities. You also could be ordered to cease all operations, which then leaves you vulnerable to even more legal trouble due to breach of contract suits from customers.
Conclusion
When it comes to defining yourself as a contractor and as a business, there can be some unavoidable headaches. As long as you follow the correct licensing and registration steps, however, it’s unlikely that you’ll find yourself working illegitimately or without the proper business resources at your disposal.
If you need assistance getting started with the contractor licensing process or have any questions, schedule a Start-Up Call with one of our dedicated licensing specialists! This call comes with a $79 discount code that can be applied to a future purchase of a course or service.
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