When most people start any kind of business from home, be it online or not, generally it will be operated as a sole proprietorship.

And there’s good reason for that: it’s simple and convenient.

There are rarely any forms to fill out to start things and at tax time your additional paperwork load will generally be minimal.

But operating your online business as a sole proprietor doesn’t get you off that easily; there are some requirements you should be aware of, along with some potential pitfalls.

Now, I’m not saying it’s necessary to go out and form a company or LLC, but there are issues to keep in mind, which I’ll address below. Please note, this information is not all inclusive. It’s generally geared towards someone living in the US, but policies differ for each state along with other countries.

Tax ID: Most people will begin operating their sole proprietorship using their social security number (SSN) for tax purposes by providing it when required. However, if you don’t desire to provide your social security number for this fashion, you can file for an employer identification number (EIN) with the IRS using Form SS-4.

You can then provide the EIN when asked for a tax id, rather than your personal SSN.

Please note, an EIN is not required to operate as a sole proprietor, but if you apply for and receive one then you’ll need to include it when you file taxes.

Tax filings: And that brings us to our next item of tax requirements for sole proprietors. Things get much more complicated if you’re paying an employee to do work for you (a contracted job is different), but I’ll assume that you aren’t.

Along with your Form 1040 which you normally file, you’ll need to fill out a few additional Schedules depending on your situation. Regardless if your business has a profit or loss, you’ll need to fill out Schedule C or C-EZ. Which one you file depends on your situation; the IRS documentation does a good job determining this.

Also, if you have a profit when filling out Schedule C or C-EZ, you’ll be directed to fill out Schedule SE, which is for self employment tax. When you work a “regular job” social security, medicare, and income taxes come out of your check automatically. In addition, whatever amounts you see removed from your pay stub, your employer matches that amount when it sends a check to the IRS.

When you’re self employed, you need to pay the entire amount of social security, medicare, and income taxes on your profit; not just half which occurs at a regular job. Generally, this amounts to about 15.3% of your profit that you’ll owe Uncle Sam. But don’t despair completely, as of today you can deduct 50% of these taxes on Form 1040 line 27, as instructed by Schedule SE.

So far we’ve got Schedule C or C-EZ and Schedule SE.

There also may be one more catch, depending on your situation. At the end of the year, the IRS doesn’t like it if you owe them over $1,000; they want you to pay that back to them “as you go” and not in one lump sum at the end of the taxable year.

That’s where Form 1040-ES comes in: it’s used to calculate your estimated taxes for the following tax year. Then you’ll gradually send the IRS payments over the following year, rather than the end. For implications with this or other forms, I highly recommend you contact a local accountant, even someone at H&R Block, for details for your specific situation.

Legal Responsibility: A final issue of concern for sole proprietors with Internet businesses are legal implications.

Now, your chances of getting sued are slim to none, but that doesn’t mean you shouldn’t consider this issue. After all, just because you probably won’t ever get struck by lightning, doesn’t mean you should go out and fly a kite in a storm!

If you’re operating as a sole proprietor and you’re found guilty of a criminal or civil suit, your personal assets could be seized to pay any fines, penalties, settlements, etc. The house that your family lives in….gone. The cars you use to take the kids to soccer practice….gone.

That’s a risk you run when operating as a sole proprietor and not as a company or LLC. In the eye of the law, a properly ran company or LLC is like a separate individual.

My advice is to be careful what you publish online. Because the Internet is still a new medium in the eyes of the law, you could be breaking another state’s law if your site visitor logs on from another state. That could mean costly transportation and court fees to settle an out of state suit.

Two simple things you can provide on your site are disclaimers and terms of use statements. These should help to lessen the chances that you’re held personally responsible for someone else reading your content and getting hurt. For more specifics, contact an attorney to help craft documents to protect your business and web sites.

None of these issues were raised to scare you or convince you not to start an Internet based business. On the contrary, I’m trying to give you the information to start your venture in the best manner possible. After all, no one wants unwanted mail from the IRS or a court summons!