Independent Contractor Compliance Blog - by Collabrus™

The Short Answer: Nothing-for all practical purposes they’re the same.

If you’re surprised read on.

It may be easier if we explore some traits about each animal:

A sole proprietor (without employees) is a business wholly owned by a single person, which provides goods or services to other entities.

Traits:

• Operates their own business independent of detailed direction and control of the clients and customers.
• Has unlimited liability for any debts or torts arising from the business enterprise.
• Income from the trade or business is taxed on the individual’s personal income tax return.*
• May file a Schedule C on their tax return for certain expenses not allowed to common law employees.
• Responsible for all of their own expenses.
• Responsible to provide their own supplies and equipment.
• Responsible to seek out new clients and customers.
• May operate under a “Doing Business As” (DBA) name.
• If you use their services you are not responsible for their taxes, any insurance, retirement funds or other benefits.

An Independent Contractor (without employees) is an individual, or single person, who is in his/her own business and provides goods or services to other entities.

Traits:

• Operates their own business independent of detailed direction and control of the clients and customers.
• Has unlimited liability for any debts or torts arising from the business enterprise.
• Income from the trade or business is taxed on the individual’s personal income tax return.*
• May file a Schedule C on their tax return for certain expenses not allowed to common law employees.
• Responsible for all of their own expenses.
• Responsible to provide own supplies and equipment. (These last two factors are commonly not followed, but are considered strong indicators of an IC)
• Responsible to seek out new clients and customers.
• May operate under a “Doing Business As” (DBA) name.
• If you use their services you are not responsible for their taxes, any insurance, retirement funds or other benefits.

What’s different?

As you can see there’s not much of a difference. The confusion is usually a result of a colloquial characterization between the two:

• An IC is usually thought of as providing services to other businesses, under a written or oral contract for a specific job, like a software engineer. Often without a storefront or other investment in a facility, equipment or inventory.
• A sole proprietor is usually thought of as serving the general public, like a small store owner, and is someone who has some investment in a facility, equipment and inventory.

However, that colloquial distinction is not a legal requirement.  Both can be either.  Practically speaking, the difference between a sole proprietor and an IC is in the name only-not in substance.

What about IC’s and Sole Proprietors with employees?

Why did I specify IC’s and sole proprietors without employees?  Well, if they both have employees they’re both Employers.

*An IC may operate as either a private individual or an LLC.  A sole proprietor may also form an LLC. An LLC organized as a sole proprietorship is treated as a sole proprietorship. If either forms a LLC partnership or a corporation, then by definition they are no longer a sole proprietorship or an IC. This is a change in business form. Depending on which option is chosen, IC’s and sole proprietors are legally treated and taxed consistently with the form of legal entity they chose. They change to what they have legally formed, regardless how they may think of themselves privately.