Sole Proprietorships

Overview

A sole proprietorship is the easiest, fastest structure choice for a farmers market; however, its ease comes with a cost. Unlike limited liability companies (LLCs) and corporations, sole proprietorships do not protect personal assets from business liabilities.

Farmers markets organized as sole proprietorships can be large or small, have many employees or none, and make a large profit or none at all. A sole proprietorship is created without any formal action—the owner (called the “sole proprietor”) simply begins the operation of the market. A farmers market structured as a sole proprietorship has a single owner. The owner of a farmers market is the person who is responsible for satisfying the market’s tax obligations as a business with regards to the Internal Revenue Service and state departments of revenue. The sole proprietorship is a for-profit business, and, as such, taxes are owed on any profits generated by the market organization.

A "Default" Business Structure

It’s possible to form a sole proprietorship without realizing it. If you (1) start a farmers market by yourself—not on someone else’s payroll, not with a broad committee of people who also make key decisions, and not with a partner, although you may have employees or volunteers—and (2) you haven’t taken additional steps to become a nonprofit, LLC, or corporation, then, under state law, you’re generally considered a sole proprietorship. This means you also bear the responsibility to account for the farmers market’s tax obligations.

Defining Characteristics

Key characteristics that distinguish the sole proprietorship from an LLC or corporation:

Easy to form. Sole proprietorships may not require any additional steps for formation.
Few to no annual maintenance obligations. Sole proprietorships generally have no annual maintenance obligations in terms of business meetings or reports to the state, aside from taxes.
No personal asset protection. The owner of a sole proprietorship may be personally liable for obligations and debts that the farmers market incurs.

Key characteristics that distinguish the sole proprietorship from a nonprofit:

Exclusive ownership and control. As with any for-profit business structure, the owner ultimately controls all farmers market assets, although responsibility for day-to-day matters can be delegated to employees and independent contractors.
Exclusive rights to profits and losses. As with any for-profit business structure, the sole proprietor (a.k.a. farmers market owner) has exclusive rights to all profits or losses that the farmers market as a whole generates (not the profits or losses generated by individual vendors).
Donations not tax-deductible. As with any for-profit business structure, if the farmers market plans to receive donations from organizations or community members, donations will not be tax deductible for the donor.
For-profit business structure. A farmers market organized as a sole proprietorship is considered a for-profit business whether or not the market actually generates a profit. The perception of being a “business” may be beneficial in some circumstances but not in others.
Limitations on use of volunteers. As with all for-profit business structures, sole proprietorships are limited in their ability to legally use volunteers and unpaid staff persons. To learn more, click here.

Getting Started

A sole proprietorship is perhaps the easiest business structure to launch: an owner simply starts market operations. At that point, if the owner has not taken additional steps to choose a business entity, the farmers market is a sole proprietorship by default.

Although there are no required procedures to form the sole proprietorship itself, there are of course other laws that must be followed. Farmers market owners, including sole proprietors, will need to explore these issues:

If the farmers market goes by any name other than the sole proprietor’s personal name (for example, Henry Smith’s Farmers Market), the name must be registered with the state or county. This paperwork, generally called a trade name application or registration, ensures that individuals can discover which person or people own the farmers market. A modest fee is usually required.
Some municipalities may require that farmers markets secure a farmers market or retail license before conducting business. These licenses may go by different names including retail food permits or event permits. Farmers market owners will need to check with their state, county, and municipality to learn if a license is required.
A sales tax license may be required if the market itself plans to sell goods, such as tote bags or mugs.

This list is not exhaustive. State, county, and local governments may require additional licenses, permits, or registrations. Local government offices and Small Business Administration offices are able to provide further guidance.

Sole Proprietors Aren't Shielded From Liability

The biggest drawback to a sole proprietorship involves the issue of liability. All farmers markets are exposed to potential liability. Guests can trip and fall. The market may take out loans it cannot pay back. Wind can blow tents into vehicles. The most concerning aspect of a sole proprietorship is that the owner’s personal assets are potentially available to satisfy these business liabilities. That means that if an injured person sues the farmers market and wins, the person can ask the court for the owner’s personal assets to satisfy the claim. Likewise, a creditor can pursue the owner’s personal assets to satisfy a debt.

Personal assets are at risk

The owner’s personal assets are at risk because the law does not distinguish between a sole proprietorship and its owner. It treats them as one and the same. By contrast, with LLCs and corporations, the law treats the business (and its legal obligations and debts) as distinct from the owner (and the owner’s personal legal obligations and debts). As a result, an obligation of an LLC or corporation is an obligation of the business alone, not the individual who runs it. Likewise, a lawsuit against an LLC or corporation is a lawsuit against the LLC or corporation itself, not the individual who runs it. In a lawsuit, generally only the assets of the business are at stake, not the personal assets of the owner. This is why people say that corporate forms “shield” their owners from personal liability for business matters.

Although this is a legitimate concern for potential farmers market owners, there are millions of sole proprietorships operating today in all industries. There are a few reasons why people continue to own and operate sole proprietorships.

Insurance provides some protection

Businesses primarily rely on insurance to manage their liability concerns. Businesses, including farmers markets, buy insurance policies to cover potential injury and property damage liabilities. The insurance company pays the resulting judgment up to the policy’s limits. With insurance, both the business’ assets and the owner’s personal assets have protection. Insurance is seen as a primary risk management strategy, while the business structure, such as an LLC or corporation, is often considered a second line of defense. In the case of debt, sole proprietors may rely on the bankruptcy code, which will protect some assets such as homestead and primary vehicle.

Assessing the risks

For many business owners, the risk of exposing personal assets to business liabilities is too great. These business owners prefer to form an LLC, corporation, or other entity that offers personal liability protection. Business owners who choose to form an LLC, corporation, or other entity give up conveniences and take on expenses for this protection. Farmers market owners should be aware of the costs and obligations before choosing to form an entity that offers personal asset protection. These issues are discussed in each entity section.

Example 1
Example 2

Sole Proprietorship: Example 1

Let’s say Sally Smith starts operating Sun Valley Farmers Market and chooses to structure the business as a sole proprietorship. Sally signs a lease with a local mall to host the farmers market in the parking lot. Sally is responsible for fulfilling the lease’s obligations, such as making rent payments. If she is unable to meet those obligations, the mall owner could choose to sue Sally. The mall owner could ask the court to give him rights to Sally’s hunting cabin, stocks and bonds, or other personal assets to pay off her rent debt, for example.

Sole Proprietorship: Example 2

Now, let’s say that Sally has her own stall at the farmers market where she does outreach and management duties for the market. The tent over her stall catches a gust of wind and hits a guest in the face. The guest files a claim against the farmers market for the injury. In the ideal case, Sally would hand over the claim immediately to her insurance company. The insurance company would handle the case and pay on any resulting judgment. If for some reason the insurance did not cover the incident or the judgment exceeded Sally’s policy limits, the injured person could ask a court for access to Sally’s personal assets, such as a recreational vehicle, to cover the judgment amount.

To see how insurance helped one farmers market that was sued by a customer who tripped, fell, and sustained an injury on market grounds, read the Capital City Farmers Market Case Study.

Sole Proprietors Hold All Control and Decision-Making Responsibilities

The owner of a sole proprietorship (called the “sole proprietor”) has ultimate accountability for the rights and responsibilities of the business. A sole proprietor may delegate decision-making authority to employees and independent contractors, but is ultimately the person responsible for the business’ liabilities, debts, and tax obligations, for example.

Succession Planning

It’s important for markets to think proactively about leadership changes before they happen. Keeping files organized and in one place can help create an easy, go-to spot for finding answers about the market and for ensuring continuity during transitions. Learn more about how you can prepare for smooth transitions in Recordkeeping.

To the IRS, Sole Proprietorships and their Owners are One and the Same

Sole proprietorships, as businesses, are not taxable entities themselves. As the IRS sees it, all profits and losses of a sole proprietorship are the owner's, to be accounted for on the owner’s annual tax return. In the language of the law, the profits and losses “pass through” the business to the owner. Generally, sole proprietors simply report their business profits and losses on their personal tax returns (for farmers markets set up as sole proprietorships, the Form 1040 Schedule C or C-EZ are commonly used), and are taxed at personal income tax rates based on their total income, credits, and deductions. Sole proprietorships are not taxed at corporate tax rates.

The annual tax obligation of a sole proprietorship is difficult to determine in advance because it depends on the business’s specific revenue and expenses along with the deductibility of those expenses. An excellent bookkeeping system can go a long way to efficiently manage the potential tax outcomes of a farmers market operation. Tax preparers and accountants can help the sole proprietor anticipate tax obligations in real time as the end of the fiscal year approaches. Many sole proprietors make decisions about significant expenses near the end of the year, in part as a strategy to manage their emerging tax situation.

Most sole proprietors must pay self-employment tax

If a sole proprietorship’s net earnings are $400 or more, the sole proprietor has to pay self-employment tax. Self-employment tax includes Social Security and Medicare taxes. Sole proprietors report their self-employment tax on Form 1040 Schedule SE. In 2017, the self-employment tax rate was 15.3% for the first $127,200 of net earnings. For more information on self-employment tax, click here.

Quarterly estimated taxes are paid ahead of the annual return

Sole proprietors generally must pay quarterly estimated taxes if they expect to owe $1,000 or more in taxes when they file their annual returns. As a farmers market owner just starting out, it can be difficult to know whether or not to expect a tax obligation of $1,000 or more by the end of the year. The safest route is to make estimated tax payments because the IRS can assess penalties for failing to make estimated payments—even if there’s a refund at the end of the year. For more on estimated taxes, click here.

Getting help

Working with an accountant or tax preparer and having a reasonably accurate business plan can help a sole proprietor manage tax obligations. Any business owner who does not plan to work with an accountant or tax preparer should prepare well in advance and thoroughly research how to file taxes, the potential tax outcomes, and the records that need to be kept.

Farmers market owners who also own a farm business should note that farmers market businesses are handled differently from farm businesses under the tax code. The farmers market will likely need separate bookkeeping from that of the farm business. The farmers market business follows different rules for deductibility of certain expenses, depreciation, and so forth. For example, the owner will likely file a Schedule F for the farm business and a Schedule C for the farmers market business accounting.

For more information on sole proprietorships and taxes from the IRS website, click here.

Employer Identification Numbers

An Employer Identification Number (EIN) is a number issued by the IRS to various kinds of taxable entities, including sole proprietorships. By completing a simple form, a business can get an EIN in a matter of hours.

Entities are required to have an EIN if they answer “yes” to any of the following questions:

Do you have employees?
Do you operate your business as a corporation or a partnership?
Do you file any of these tax returns: Employment; Excise; or Alcohol, Tobacco, and Firearms?
Do you withhold taxes on income, other than wages, paid to a non-resident alien?
Do you have a Keogh plan?
Are you involved with any of the following types of organizations?
- Trusts, except certain grantor-owned revocable trusts, individual retirement accounts (IRAs), Exempt Organization Business Income Tax Returns
- Estates
- Real estate mortgage investment conduits
- Nonprofit organizations
- Farmers’ cooperatives
- Plan administrators

Even if the internal revenue service (IRS) does not require an EIN, banks, lenders, and other institutions may require it. These other entities may require an EIN simply as a paperwork convenience or because they want the security that the sole proprietorship is registered with the IRS, even if it isn’t required.

Background Law

Sole proprietorships do not have organizing documents. This would be rather pointless—there’s just one owner, so she gets to make all the decisions for how to run the farmers market without having to refer to any instructions on voting and such.

The legal name for a sole proprietorship is the owner’s name. Any legal documents that must be signed, such as a business license application, must be done in that name. Some sole proprietors choose to use a fictitious business name—often referred to as a “DBA,” which stands for “doing business as”—when marketing their products or services to the public. To obtain a DBA, the owner must complete appropriate paperwork and pay a filing fee. This is typically done with a local or county agency, but some states require it to be filed with a state agency—such as the Secretary of State—instead of or in addition to the county.

A sole proprietorship is considered a business and must follow any state and local government rules that apply to businesses operating there. These laws vary from state to state. They could include registering with state or local government agencies, applying for a certificate to collect sales taxes, or filing a business license application. Before starting a farmers market as a sole proprietorship, be sure to research what rules and regulations apply to businesses operating in your state, as well as the city and county where the farmers market is located.

I organized and set up a farmers market, but I don’t think of myself as an “owner.” How do I know if I’m the owner and whether I have a sole proprietorship?
My farmers market doesn’t have any assets, doesn’t make a profit, and has few to no transactions itself. Am I still a sole proprietor if I’m the owner of the market? Is the farmers market still taxable as a business?

I organized and set up a farmers market, but I don’t think of myself as an “owner.” How do I know if I’m the owner and whether I have a sole proprietorship?

This can be a tricky question! We rarely think of a farmers market as a business with an owner. Instead, we think of it as a collection of farmers who are working together to sell their product in the same location. This may be the case, but the market can still have an owner. Let’s say one person generally makes all the decisions for the market. Let’s also say that person manages the collection of fees, pays expenses such as leases, secures permits, and generally handles the business of the market itself. The more autonomous that person acts, the more likely he or she is the owner.

A person can be the “owner” of a farmers market and still designate all responsibility to another person. For example, the owner could hire a market manager. The owner can ask the market manager to be in charge of all day-to-day responsibilities and give that person wide authority to make decisions. Ownership sometimes comes down to whether a person can shut down the business and expects control over any profit made. Employees and volunteer farmers market managers generally cannot shut the market down, open bank accounts, or manage the market’s tax obligations. Thus, they are generally not owners. The owner is the person who has authority to make those decisions.

On the other hand, let’s say one person is generally responsible for carrying out the will of the farmers market vendors as a whole. For example, let’s say a committee of vendors directs one person to sign leases, get permits, etc. Because the decisions are actually made by the vendors as a whole or their representatives on the committee, this is less likely to be a single owner situation. Instead, it’s more likely to be an unincorporated nonprofit association.

When it’s unclear whether a person is or is not an owner, the best route is to consult an attorney. This is an important question, and it can only be answered by looking at exactly how decisions are made, how responsibility is delegated, and who holds responsibility for the tax obligations of the farmers market overall.

Back to questions

My farmers market doesn’t have any assets, doesn’t make a profit, and has few to no transactions itself. Am I still a sole proprietor if I’m the owner of the market? Is the farmers market still taxable as a business?

In a word, yes. All enterprises, no matter how big, small, profitable, or unprofitable they are, need to account for their tax obligations to the IRS in some form or another. Simply by convening farmers in a specific place for the purpose of vending product, an obligation to the IRS has been created. In this section, we discuss whether and how that obligation is as a sole proprietor. A market might also be an unincorporated nonprofit association.

If the farmers market has no assets, no revenue, and no expenses, the required tax forms should be very easy to complete! But they still need to be completed. Most farmers markets will have assets, expenses, and revenues. For example, a lease can be an asset with market value. Selling tote bags or charging fees for credit card usage can create revenue. Permit fees or credit card processing fees are farmers market expenses.

Certainly, many farmers markets spend as much as they take in and generate no net profit. Regardless, the IRS needs to know that no profit has been made. Thus, the farmers market needs to keep careful records and the sole proprietor still needs to account for the market on his or her tax return.