A sole proprietorship is a business run by a single owner who pays personal income tax on the profits gained from the business, often because creating a separate trade name is not necessary. As of 2020, the Internal Revenue Service (IRS) reported 28.4 million individual tax returns from sole proprietorships. Consultants, freelancers and self-contractors find it easy to start out as a sole proprietorship due the to lack government imposed restrictions on this kind of business.
The number of employees in a sole proprietorship determines the tax obligations and employee benefits offered by the employer. From the perspective of an employer, the management of human resources, planning for growth and calculating risks heavily depends on the strength of the workforce.
So if you are a sole proprietor who needs help running their business, you might have tons of questions. Can you hire employees? If yes, how many? If you’re looking for answers, you have come to the right place. Before we dive into the specifics of hiring employees as a sole proprietor, let’s look at how a sole proprietorship works.
How does a sole proprietorship work?
People who carry out business transactions without registering themselves as a business are considered to have a sole proprietorship. People who offer their professional services as an artist, writer, photographer, designer, etc. are automatically defined as sole proprietors.
In a sole proprietorship, business assets and liabilities are not separate from personal ones; clearing debts and managing the impact of the losses falls on the individual, rather than any separate business entity. This is because owners typically operate from a personal bank account, rather than a business checking account.
Sole proprietorships are the easiest to form and dismantle due to less governmental regulations. Some states may require you to have a license or permit to form a sole proprietorship, but the paperwork and procedure is comparatively lesser than registered businesses.
Can a sole proprietorship have employees?
Yes, a sole proprietorship can definitely have employees. Being a sole proprietor doesn’t mean you have to do all the heavy lifting yourself; you are allowed to hire help. There is no fixed upper or lower limit on the number of employees in a sole proprietorship in the USA. Owners can hire staff as per their business requirements, and modify the strength of their organization as the business grows.
So, there you have it, you can hire employees, and you can hire as many as you require. Before you start hiring employees as a sole proprietor, remember to read up on legal aspects of having employees as an employer in the USA.
Eligibility to work
Ensure that the candidates you are considering are legally eligible to work in the United States. Have them fill out Form I-9 for employment eligibility verification. This is an important step for all businesses to avoid legal trouble with respect to citizenship, immigration, and any other issues with eligibility.
Employee and employer identification
Apply for an Employers’ Identification Number, a unique number that helps the Internal Revenue Service (IRS) identify your business entity. It is not mandatory for sole proprietors to have an EIN, they can use their social security number instead. But if you want to expand in the future and register yourself as a business entity, it is good to have an EIN beforehand. The IRS also requires you to keep a record of the names and Social Security Numbers (SSN) of your employees.
Employment taxes
Once you hire, you are eligible to pay employment taxes. You have to withhold certain tax amounts from the paychecks you give out. These include federal and state income taxes, Federal Insurance Contributions Act (FICA) taxes, and Federal Unemployment Tax Act (FUTA) taxes.
The tax paid through FICA is meant for contribution to social security and Medicare, while FUTA taxes are used to help fund state workforce agencies. These withheld taxes have to be mentioned on Form W-2, a tax form that reports salaries paid to and taxes withheld from employees.
You are also required to collect from every employee, a Form W-4 (Employees’ Withholding Certificate). This is a form that an employee fills to inform you of how much tax should be withheld from their salary amount. The employee’s tax filing status, additional jobs, number of dependents, and such other information is specified on this form.
Documentation of work policies
It is important to clarify all work policies and procedures through employee handbooks and employment contracts. The nature of work, timings, service conditions, leave policy, employee benefits, etc. need to be clarified in the employment agreement.
Factors influencing number of employees
Both external economic conditions and the internal characteristics of a business influence the strength of staff in a sole proprietorship.
Industry type
Some industries require larger groups of people to coordinate and deliver a product, e.g., manufacturing or retail businesses require employees for several functions like warehouse management, transportation, maintaining supplier relations, etc. Service based businesses, on the other hand, like doctors, accountants, hair stylists, designers, etc. require lesser number of employees for administrative functions.
Owner’s capacities
If the owner is adequately skilled in various domains, e.g. finances and sales, they won’t need to hire experts for specific functions. However, even with a diverse skill set, as the business expands, it may become difficult for the owner to divide attention between various operations. Hence, the owner’s capacity for handling various aspects of the business, along with the size and scale of the business, determines how many people need to be hired for help.
Financial stability
If the organization is financially stable, owners can afford to spare some portion of the revenue for salaries and employment benefits. Sole proprietors may hire more employees as the business grows; at the same time they may need to downsize in times of economic slowdown.
Technology and automation
Automation and mechanization of the workplace has left no industry or sector untouched. If sole proprietors have access to technology that performs certain business operations effectively, they might not need employees, or might need lesser employees in that particular department.
For example, customer management software helps the owners to send automated responses to customer queries, and filter out issues that actually need one-on-one interactions for resolving. In that case, they will hire fewer employees in the customer care department.
In this article, we looked at how a sole proprietorship works, legal and practical aspects of hiring employees as a sole proprietor and factors that may influence the number of employees in a sole proprietorship. Sure, that sounds like a lot of information at once. Take your time to understand the nitty-gritties of the process, and when you are ready to start, be prepared for some paperwork!
While sole proprietorships don’t have a legal existence separate from their owner, they can indeed have as many employees as require. As long as you adhere to the federal and state laws, and the guidelines of the IRS, with complete paperwork and documentation, you are absolutely set to get your business off the ground!
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