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Sole Proprietorship: What You Need To Know and How To Form One

What is Sole Proprietorship?

New freelancers and entrepreneurs might benefit in forming a sole proprietorship business structure over a formal business entity structure such as an LLC or corporation because of its simplicity to create and manage. Sole proprietors are single owners and are not considered employees of their organization, nor employees of their customers, but rather classified as an independent contractor. A sole proprietorship does not offer legal protection between you and your business because the individual and business are one and the same. All business income is received by the sole proprietor, who is also responsible for any liabilities and financial debts the business might assume.

Is a Sole Proprietorship Right For You?

A sole proprietorship may be the best option for an entrepreneur who offers products or services that might carry minimal legal risks associated with the business activity. If you do not plan on hiring employees, nor want to deal with formal corporate compliance with the state, a sole proprietorship may be a better route. When considering any business structure, including a sole proprietorship, LLC or corporation, entrepreneurs should discuss these matters with an attorney or tax professional for the best possible guidance. This will allow you to determine the optimal legal structure for your business as it relates to liability and taxes. 

What Are The Benefits of a Proprietorship?

  • Easy and inexpensive to set up and manage.

  • Tax credits and deductions. 

  • Lack of compliance requirements such as meeting minutes, bylaws and other necessary state filings. 

  • Reporting taxes are easier because business activity flows through the owner’s personal tax returns. 

  • More control over your business.

What Are The Disadvantages of a Sole Proprietorship?

  • Personal liability for any debts, liabilities or lawsuits the business may incur. 

  • Possibly more difficult to obtain business loans or raise capital to operate and grow. 

  • Compared to an LLC or Inc. entity structure, a sole proprietorship may be perceived as less credible to customers or vendors looking to do business with you.  

How do I form a sole proprietorship?

Since a sole proprietorship is not a formal business entity such as an LLC or C Corporation, business registration paperwork isn’t required for the State. A sole proprietorship is established once the owner begins conducting business activities with the goal of generating profit. In order to legally operate within a specific location or line of work, certain licenses or permits may need to be obtained. The general steps for forming a sole proprietorship are as follows:

  1. Name your sole proprietorship 

  2. File for your EIN and understand tax requirements

  3. Research and obtain any necessary business licenses, permits and insurance required

  1. Name your Sole Proprietorship 

Your business name can contain your name and in addition a description of the intended work you’ll do, such as “Mary Smith Bakery.” Under this circumstance, you would not be required to register your business name. However, if you prefer to name your business “Baked cookies and treats,” you would be required to apply for a DBA (doing business as), sometimes known as a fictitious business name, to register your name. 

When applying for a DBA, you will need to make sure that the particular name is available through the Secretary of State’s searchable database. If your business name is not currently in use by another individual, you are able to register your DBA name. SunDoc Filings is able to assist throughout the entire DBA registration process

  1. File an EIN (Employment Identification Number) If Required

Most sole proprietors aren’t required to obtain an employment identification number. You are required to do so if you plan on opening a retirement account or hire employees. However, obtaining an EINcould be beneficial if one plans on opening a business bank account, as some banks may prefer this. The downside of not securing an EIN is that you must use your Social Security number, which may expose you to possible fraudulent activities. 

  1. Identify and Obtain Necessary Business Licenses if Applicable

Business Licenses are permits issued by government agencies that allow individuals or entities to conduct business within a specific jurisdiction. Your company’s business activity, physical location, employee count or form of business ownership will determine the proper licenses needed to legally operate. Failure to comply with license, permit and tax registration requirements can lead to expensive penalties or leave business owners without legal protection. For example, a bar in California would need a liquor license. SunDoc Filings can assist you with identifying the proper Business License paperwork and filing instructions your business may require. 

Learn what a sole proprietorship is, the advantages and disadvantages, and how you can form one to become a sole proprietor.

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