What is Sole Proprietorship?
A sole proprietorship is a business owned and run by an individual. It is not a legal entity but a description of a type of business, so there are no formal papers to file to create one. With a sole proprietorship, the individual and business are one and the same.
Many entrepreneurs run new businesses as sole proprietorships because they are established automatically when an individual decides to begin selling goods or services. Independent graphic designers, snow plowing services, or personal chefs all run sole proprietorships if they are the owners.
Although you don’t have to submit official paperwork to establish a sole proprietorship, depending on your state, county, or city, you may have to get a business license or permit. Whether you are required to obtain a license or permit will depend on the type of business you run. You can check here to determine what type of license or permit you need.
Using Your Real Name
As long as you use your personal name as your business name, you don’t have to file any paperwork about that either. However, if you want to name your business something other than your name, you may need to file papers to indicate you are “Doing Business As…,” which is also known as a DBA form. Many, but not all, states require DBA or “fictitious name” forms in that case. Before your state or county courthouse will accept your DBA filing, you’ll first need to check to verify that no one else is using that name; you can’t use a name someone else has claimed.
Because you are your business, any revenue you earn from your business is considered personal income, which you pay personal taxes on. Although you won’t have additional business taxes, you will pay self-employment taxes and estimated taxes, based on what you earned the previous quarter. Check with the IRS to learn how to track and pay those amounts.
The advantages of operating as a sole proprietor are that you don’t have to do anything to establish your business. It automatically exists as soon as you start to sell something. You also don’t have a second set of business tax forms to complete; a Schedule C and form 1040 are all the IRS requires each year, plus the SE for your self-employment taxes. Without that extra taxation, sole proprietorships have the lowest tax rates. And because you are the sole owner, you have complete control over your business and how it is run.
On the flip side, the simplicity of operating a sole proprietorship is also a liability. Because you are your business, if your company is sued, you are personally responsible for any judgment. Such a loss could be catastrophic to your financial health. Because your business is built around you, it is also harder to raise money from investors or to secure a business loan; you may be able to qualify for a personal loan that you can then use for business purposes but, once again, you are personally liable if the business fails.
Sole proprietorships are simple and easy to create, but as your business grows, you may decide that establishing a limited liability corporation or Sub-chapter S corporation could provide more legal protection against lawsuits, should your business ever run into trouble.