I am currently employed full-time by a company and make ~100k per
year.  My state of residence is Minnesota.  In addition to my
full-time job, I am interested in consulting during the evenings and
weekends.  For my consulting work, I will be invoicing my clients on a
monthly basis and I expect to receive a 1099 form each year from my
clients.  The consulting I will be performing is analysis driven and I
am not too concerned about liability.  For the first year, I only
expect to make between 6k-10k.  Here are my questions:

1)  Is it necessary for me to set up a Sole Proprietorship?  What are
the advantages/disadvantages of setting up a Sole Proprietorship?
2)  How do I go about setting up a Sole Proprietorship in Minnesota? 
A link to an online form would be great!
3)  Would you recommend an LLC vs. a Sole Proprietorship?  I would
like to keep expenses down and I am not too concerned about
liabilities due to the nature of my work.
4)  I would like to offset most of my income from my consulting work. 
What deductions are legal for my consulting business.  A link would be
great.

Thanks for you help.
Tim

Hello and thank you for your question.

1)  Is it necessary for you to set up a Sole Proprietorship?  What are
the advantages/disadvantages of setting up a Sole Proprietorship?
     As the comment below correctly notes, you don't have to set up a
sole proprietorship; just do business under your own name (or an
assumed name/tradename) and you've done it.
     You'll report all income and expenses on your personal income tax
return, Form 1040.
     The alternative to a sole proprietorship would be to form a
limited liability company (LLC) with yourself as 100% owner.  The only
advantage of doing this is to protect assets in some cases if you are
sued.  Taxwise the treatment is exactly the same, with all income and
expenses reported on your personal income tax return, because the IRS
considers a wholly owned LLC as a "disregarded entity."

Small Business/Self-Employed/Other Business : Entities: Sole
Proprietor, Partnership, Limited Liability Company/Partnership
(LLC/LLP), Corporation, Subchapter S Corporation
http://www.irs.gov/faqs/faq12-1.html

2)  How do I go about setting up a Sole Proprietorship in Minnesota? 
Really there's nothing you need to do if you're using your personal name.
"In Minnesota, single member LLCs have been allowed since August 1,
1997. The fee [in 2002; perhaps it's gone up] for organizing an LLC in
Minnesota is $135. You can get a free copy of the Articles of
Organization form and other information by calling the Minnesota
Secretary of State's office at (612) 296-2803."
http://www.gwcartercpa.com/llc.htm

3)  Would you recommend an LLC vs. a Sole Proprietorship?  I would
like to keep expenses down and I am not too concerned about
liabilities due to the nature of my work.
If you don't care about liability, and you're not planning to take in
any business partners, you don't need to form an LLC.  Again, the tax
treatment is the same either way.

4)  I would like to offset most of my income from my consulting work. 
What deductions are legal for my consulting business.
Here's an IRS list of business deductions:
http://www.irs.gov/businesses/small/article/0,,id=109807,00.html

If you plan to use excess deductions to shelter your regular income,
you'll have to be ready to show that your business is legitimately
entered into for profit (since obviously it will be running at a loss
if expenses exceed income).
Is It A Business of a Hobby?
http://www.irs.gov/businesses/small/article/0,,id=99239,00.html

Search terms used:
llc "disregarded entity" minnesota
"disregarded entity" site:irs.gov
deductible expenses


Thanks for letting us help, and good luck in your venture

Google Answers Researcher
Richard-ga

Thanks for the answers and relevant links.

1) by definition you are a Sole prop. if you have no other partners
and aren't incorporated.

2) just get a biz license at city hall and use your name as the biz name
otherwise file a fictitious name w/ the local paper who will publish it (required)
and get it filed w/ city hall.

3) LLC helps with liablity, costs about $1500 and well worth it.

4) see your local tax guy for legal deductions.
for starters.
1) mileage to.from clients
2) phone use
3) computer, internet use
4) meals out for entertaining
5) marketing material costs- kinkos printing, paper, new laser printer ,etc.

good luck,
greg

Until year 2000, I filed a schedule C with a loss of a few hundred
dollars 16 out of 20 years. IRS did not complain once even though I
discovered a small error in previous years schedule C at least 8
times. I suppose I would have been audited had I claimed losses of
thousands of dollars, but that would have been dishonest. The
instructions for schedule C are clearer than most IRS forms, but you
do occasionaly need to pick a reasonable bottom line, and insert
believable numbers to get that result.   Neil