Can a student under 18 start his own sole sole proprietorship company?

cockatiel · 09-09-2009, 09:46 AM

My son wants to start his own company. (Long story....I'd rather not get into details here.)

Dh and I approve of the venture, but we are uncertain as to whether or not a person who is not legally of age can actually head a sole proprietorship.

Folks tell us a "child" cannot do this, but we can't figure out why not.

* He would be selling widgets to folks who are already dealing with him
* He would have to fill out a 1040 and a Schedule C, but you don't have to be 18 to do that!
* He would need a business license from our local jurisdiction, but I haven't found any information stating that only those over 18 can do that.
*He would need to fill out some forms with both the IRS and our state, but none of the forms ask the age of the person filling out the form.
* He could have his business account be part of his checking account ( I know it's not recommended, but it is legal!)

I know it's unusual to have someone under 18 starting a company, but what legal hurdles would prevent him? (Dh and I do NOT want to head the company until he turns 18, which is a common solution.)

mathmom · 09-09-2009, 10:18 AM

Not an answer, but two questions.

If he gets sued are you responsible too?
As a minor you have to have a joint account with him, is that an issue?

JHS · 09-09-2009, 10:31 AM

In most states a minor cannot be an officer or director of a corporation (and a corporation needs at least one officer/director, preferably more). He could probably be a member of a limited liability company and participate in its management on that basis -- at least that's what a quick look at one statute tells me.

In general, though, contracts by minors are unenforceable. So most people will refuse to have other-than-small-scale business dealings with a minor (as opposed to the minor's guardian).

flatland · 09-09-2009, 10:57 AM

It is legal for a minor to sign a contract and enforceable in all states . However, it's enforceability rests with the minor; question of its validity and voidability. Your or/and your son's attorney would appreciate your business.

cockatiel · 09-09-2009, 11:23 AM

Yes, as a minor he cannot set up a corporation. However, he is only interested in setting up a sole proprietorship.

His business would be very small-scale -- basically manufacturing (and selling) a hobby-related item. He could do this without setting up a sole proprietorship -- he has customers who want to buy his product.

However, we want him to sell his product in a legal and above-board manner. We want him to collect (and pass on to the state) the appropriate state sales tax on what he sells. His profit should be small enough that he doesn't need to pay income tax on it, but we want him to go through the process of filling out the tax forms in order to do things legally.

In particular, we as parents won't allow him to set up a website until he has established his business legally, and he is itching to put out his info on the web.

So do we really need to tell him that he can't act on this dream until he turns 18?

ebeeeee · 09-09-2009, 11:40 AM

This is a case where I would spend a few hundred dollars and go see a business lawyer in your state. To my mind, the restrictions change too much from state to state to seek advice on the internet. YMMV.

Calreader · 09-09-2009, 12:03 PM

Cockatiel, are you asking if it's legal for a minor to do business? For examples of students who have done this, look at the threads in the financial aid section by students who applied for the McKelvey Foundation scholarship for student-entrepreneurs.

I think that depending on the kind of work, a sole proprietor may not have to take special steps to start the business. When I've done consulting as a sole proprietor, I've just worked and then reported my income on Schedule C of my tax return.

What is different about your son's situation is that he has a retail business, so there are issues of state sales tax, possibly county and city taxes, and county and city business licenses. If your son's own name is part of his business name, then he may not have to file a fictitious business name statement. That's how it is in my county. But he will need to check with the state, county, and city to see what they require. At the federal level, he might or might not have to get an EIN. As a sole proprietor you usually don't need one (you can use your SSN), but the retail aspect might change things.

My state has a nice collection of web pages about how to start a small business. You could check to see if your state has something similar.

3bm103 · 09-09-2009, 12:28 PM

Quote:

His profit should be small enough that he doesn't need to pay income tax on it, but we want him to go through the process of filling out the tax forms in order to do things legally.

Any profit over $400 would need to be reported on his return and he'd have to pay self employment tax on it.

He doesn't have to DO anything to set up a sole proprietorship except report it on schedule C on his tax return. He will, of course, need a tax ID number in order to collect and pay the sales tax. I don't see anything that prevents him from doing that.

I totally admire the way you are teaching him right from the beginning to do things the right way.

dmd77 · 09-09-2009, 12:52 PM

If he wants to sell stuff, EBay makes it easy. (Our business was actually started by two middle schoolers selling their parents' surplus on EBay.)

I would suggest that rather than go through a lot of legal setup now, that he look at ways to accomplish the same thing while he determines if he likes it. Business licenses, etc., are expensive.

cockatiel · 09-09-2009, 01:06 PM

So what IS the difference between selling stuff on ebay and starting a company?

Advertising? If you have a website advertising your wares, does that make you a company?

Volume? If you sell above a certain dollar amount on ebay, are you a company?

dmd77 · 09-09-2009, 01:21 PM

Well, there are a lot of businesses on EBay that are operated entirely out of someone's basement and no one ever comes to the door. Business licenses mainly exist to make sure people pay their taxes and don't locate in a residential area. Mail order stuff falls into a gray area. You can certainly have a business permit and operate on EBay, but it's not required. The advantage to the buyer and seller on EBay--one reason they have fees--is the insurance provided.

Having a website does not make you a company. Volume does not make you a company. Saying you're a company makes you a company.

JHS · 09-09-2009, 01:28 PM

"Starting a company" -- As others have noted, you don't have to do anything to start a business, although you may need a local license (as to which, if you obtain it a little while after you start the business, you will be in the top 1% of compliant people). If you are making retail sales, you also need a sales tax account. You may want, but don't need, a separate federal tax I.D. number, which you can obtain on the phone or online.

If you are going to be using a trade name, you probably ought to file a fictitious name registration in your state, both to make certain that the name is OK for you to use (not perfect in this regard, but helpful) and to prevent others from using it. At some point, you may want to consider a federal trademark registration, but you don't have to do that to be up and running.

You need to do a little bit more if you create an artificial entity to conduct the business -- a corporation (S or C for tax purposes), partnership (limited or general, but there has to be at least two partners), or limited liability company. That requires another state filing. It probably makes sense to create a single-member LLC, to protect personal assets against tort liabilities (and unguaranteed contract liabilities) of the business. But you don't HAVE to do that.

shawbridge · 09-09-2009, 02:09 PM

As people said, you can run a business as a sole proprietor without incorporating. You pay taxes under Schedule C on your tax return. My wife is a successful painter and has never incorporated and doesn't need to.

If there is a) potential liability (i.e., people might reasonably sue him for if widget transactions go wrong); b) if the business might go bankrupt; or c) he might bring in partners, he should consider an LLC or Schedule C. The LLC can be a pass-through for tax purposes. The Schedule C's income is taxed, but he could take out his profits, unless they are huge, as salary (and thus the C-corporation pays no or little in taxes) and can deduct things that might be harder to deduct in an LLC or as a sole proprietor. But, unless the business is really serious, I'd say either is probably overkill.

One other issue for you as parents: Do you want a 16 or 17 year old with access to lots of money if he is successful? An alternative structure is to set up a trust, have it establish the company, and then accumulate profits in the trust with your son (and perhaps his progeny) as beneficiary(ies). [Note this is a terrible strategy if you are applying for financial aid as trust assets would be counted as his assets].