Sole proprietorship
A sole proprietorship is the simplest business entity.
A sole proprietorship is a type of business structure that is the Internal Revenue Service’s automatic classification for any business started by an individual. Having a sole proprietorship means you and your business have a shared identity, so the business isn’t a separate legal entity. As the owner, you take on all of the legal responsibility if your business is sued or faces financial troubles. This is the biggest risk of a sole proprietorship.
- Sole proprietorships do not offer legal protection over your personal assets if you face a lawsuit or financial trouble.
- When registering your sole proprietorship within your state, you may have to file a doing-business-as application and register for an employer identification number.
- Sole proprietorships require the least amount of administrative work of any incorporated entity.
- This article is for business owners who want to know how to start a sole proprietorship and learn about its benefits
“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”
Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases, office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers, cleaning service providers and babysitters.
A sole proprietorship business structure has several advantages :
- Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
- Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
- Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions, such as a health insurance deduction.
- Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a day care center and wish to fold the business, refrain from operating the day care and advertising your services.
The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses.
Steps to starting a sole proprietorship
A sole proprietorship is very simple to get up and running. Because you don’t have to register your business with the state, there aren’t many formal steps. However, there are certain things you may want to apply for, depending on certain changes you might like to make to your business. Here are some steps you may want to take:
Step 1: Change your business name.
If you want your business to legally be called a name other than your own, you will have to establish what is known as a DBA. In a sole proprietorship, the sole owner is legally required to use their personal name as their domain name unless they follow the process to change the name.
To change the name of the sole proprietorship to a brand name, you must file a doing-business-as application, which gives you the option of using a different name. You must file the doing-business-as (DBA) application with the state, often through the secretary of state’s office, though the specific agency can vary from state to state. A DBA application can cost between $5 and $100 depending on the state.
When choosing a name, you must make sure it doesn’t already belong to someone else. You also don’t want to pick a name that is too similar to someone else’s. To check whether the name you want is available, visit the U.S. Patent and Trademark Office site or search your state’s DBA registry.
Step 2: Get an employer identification number.
As a sole proprietor, you will also need a federal employer identification number (EIN), which the IRS uses to identify your company when you pay taxes. Some banks even require an EIN to open a business bank account.
Step 3: Open a business bank account.
Having a bank account that is separate from your personal one helps to keep your finances organized and less entwined with your private funds.
“This is a requirement to separate business money from your personal money,” said Julia Brookes, a Now Loans finance consultant. “This will also give you a clearer view of your profit and increases your credibility in the bank in case you needed to apply for a loan.”
However, as a sole proprietor, your business’s assets are not legally considered separate from your personal assets, as would be the case for an LLC, for example; there is no limited liability associated with a sole proprietorship
Step 3: Open a business bank account.
Having a bank account that is separate from your personal one helps to keep your finances organized and less entwined with your private funds.
“This is a requirement to separate business money from your personal money,” said Julia Brookes, a Now Loans finance consultant. “This will also give you a clearer view of your profit and increases your credibility in the bank in case you needed to apply for a loan.”
However, as a sole proprietor, your business’s assets are not legally considered separate from your personal assets, as would be the case for an LLC, for example; there is no limited liability associated with a sole proprietorship
Step 4: Secure the proper paperwork needed in your state.
Depending on your industry, you may need certain business licenses, permits or zoning clearance to operate legally. Check your state’s requirements for building permits or regulations for your type of business so that you remain compliant with all applicable laws and regulations.