How to Start a Sole Proprietorship

Looking to start your own business? A sole proprietorship may be the perfect fit.

In the event of legal action or financial difficulty, sole proprietorships do not provide you with any legal protection over your personal assets.
You may need to submit an application for doing business as and sign up for an employment identification number when you establish your single proprietorship with your state.
Of all incorporated entities, sole proprietorships need the least amount of administrative effort.
This post is for entrepreneurs who wish to understand how to form a sole proprietorship and the advantages of doing so.

When launching a firm, a single proprietorship is a popular business structure that many entrepreneurs choose. A sole proprietorship may be started fairly easily, and the initial setup should only need a few quick steps.

What is a sole proprietorship?

Any company founded by a person is automatically categorised by the Internal Revenue Service as a sole proprietorship under this particular form of business structure. In a sole proprietorship, the company is not treated as a distinct legal entity since you and your business share an identity. If your company is sued or has financial difficulties, you as the owner are solely responsible. A solo proprietorship is most at danger from this.

Examples of sole proprietorships

Here are some examples of professionals that may form sole proprietorships to offer their services to clients and customers:

  • Chefs
  • Accountants
  • Writers
  • Personal trainers
  • Landscapers
  • Editors

Steps to starting a sole proprietorship

Starting a single proprietorship is quite easy. There aren’t many formal processes since you don’t have to register your firm with the state. Nevertheless, based on the improvements you may want to make to your company, there are certain things you could want to apply for. Following are some actions you may wish to take:

Step 1: Change your business name.

You must create what is known as a DBA if you want your company to legally go by a name other than your own. In a sole proprietorship, the owner must use their own name as the domain name unless they go through the proper channels to alter it.

You must submit a doing-business-as application, which provides you the choice of adopting a different name, in order to alter the name of the sole proprietorship to a brand name. Doing business as (DBA) applications must be submitted to the state, often via the secretary of state’s office, but this varies from state to state. Depending on the state, a DBA application may cost between $5 and $100.

Make sure the name you choose is not already used by someone else. Additionally, you don’t want to choose a name that is too similar to another person’s. Visit the website of the U.S. Patent and Trademark Office or do a DBA registration search in your state to see whether the name you desire is already taken.

Step 2: Get an employer identification number.

A federal employment identification number (EIN), which the IRS uses to identify your business when you pay taxes, is also required for sole proprietors. To create a business bank account, some institutions even need an EIN.

Step 3: Open a business bank account.

Your money will be more structured and less intertwined with your personal finances if you have a bank account that is distinct from your personal one.

This is necessary to keep your personal and company finances distinct, according to Julia Brookes, a financial adviser with Now Loans. This can also improve your credibility with the bank should you need to request for a loan by giving you a better picture of your profit.

However, for example ,as a single owner, there is no limited liability attached to a sole proprietorship; your company assets are not legally deemed distinct from your personal assets, as would be the case for an LLC.

Step 4: Secure the proper paperwork needed in your state.

You could require certain company licences, permits, or zoning approval to operate lawfully depending on your industry. To ensure that you continue to adhere to all relevant rules and regulations, check your state’s requirements for construction permits or restrictions for your sort of company.

Types of business entities to consider

There are a number of different business organisations than a single proprietorship that could be a better match for your firm. Because these corporations provide limited liability, your personal assets are protected in the case of penalties or legal action because your business’s assets are seen as distinct from your own.

Limited liability company (LLC)

This company form, in contrast to a sole proprietorship, shields your personal assets from any legal issues your LLC may have, so you aren’t held personally liable if your organisation is sued. Due to the fact that corporate income taxes are not applied to company revenue, an LLC is sometimes referred to as a “pass-through entity.” Profits are only subject to personal income tax when distributed to the owner or owners. To put it another way, business income “passes through” to owners and is then taxed at personal income tax rates.

Partnership

When two or more individuals jointly own a firm, this is referred to as a partnership.

According to Jeremy Harrison, the creator of Hustle Life, “If you have pals who want to pool in their money, you may elect to join a partnership.” It becomes somewhat more difficult since you must get an understanding with each party in order to create the conditions and agreement. How to Create a Partnership Agreement is a related article.

Corporations

Corporations are regarded as distinct legal persons from their owners. C companies, S corporations, B corporations, for-profit corporations, and nonprofit corporations are the five different types of corporations. Each of these corporate kinds has particular needs in terms of taxes and governance.

Sole proprietorship – advantages and disadvantages

Consider operating as a sole trader if your business is small and capital investment is minimal.

Advantages :

  • It’s simple to form and run your firm, and it’s simple to modify your legal structure later if circumstances change. You are the boss and retain all the earnings. Your startup expenses are modest. You have full anonymity.

Disadvantages:

  • Your ability to obtain finance is limited, and you are solely responsible for day-to-day company choices. Retaining top talent may be challenging, and it can be challenging to take vacations since there is no legal line between private and corporate assets.
    The life of the company is finite, and you are taxed as an individual.

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