5 Steps to Forming a Sole Proprietorship

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Statistics regarding the formation of sole proprietorships in the USA show that there was an increase of 3.5% in recent years. The amount went up from 25.5 million to 26.4 million.

What is a Sole Proprietorship?

A sole proprietorship is a type of business structure and constitutes the simplest form. In fact, the form is so simple that a number of product or service providers may be operating as sole proprietors without realising it. This can include, for example, freelance photographers or someone providing paid childcare services to family and friends. 

The US Small Business Administration (SBA) provides  a simple yet comprehensive overview of sole proprietorship, explaining that it is an “unincorporated business owned and run by one individual with no distinction between the business and the owner,” and that such a person remains responsible for the business’ losses, debts and liabilities in their personal capacity, while also being entitled to all profits made by the business. Sole proprietorship is easy to establish and maintain and, given the lack of separation between business and business owner, works best for individuals who run low risk businesses. 

So, LLC and Sole Proprietorship: What is the Difference? Simply put, the major difference between forming an LLC (Limited Liability Company) and Sole Proprietorship is the separation between the business and the personal that an LLC affords. In this manner, the business owner is protected in their personal capacity from liability and debt incurred by their business. In contrast, a business owner and their business function as the same entity under a sole proprietorship, thereby leaving the owner open to liability for debt and losses if all does not go as planned with the business. Sole Proprietors are also not as well positioned to take advantage of tax benefits in the way that LLC owners are, due to the tax “pass through” tax policy of having an LLC. 

Step 1: Select a Name 

In order to establish credibility for your business, an appropriate name needs to be chosen for your business. As a sole proprietor, you may operate under your own given name without needing to register or clear it at all. If you choose to do business under any other name, a DBA (“Doing Business As”, also sometimes referred to as fictitious, assumed or trade name) will need to be filed with the city, county or state your business is located in.

Step 2: Purchase a Domain and Secure Social Media Handles

If you wish to promote your business online and establish a social media presence, attempt to purchase a suitable domain and secure the relevant available social media handles in line with the name you have chosen for your business. 

Step 3: Register for a Business License and/or any other License Your Business Requires to Operate Legally

This process can differ greatly between cities, counties, and states. The SBA can assist in providing information on how to register your sole proprietorship in your city and how to know which additional permits and licences your specific business may need for you to avoid any fines or potential legal issues.

Step 4: Obtain an EIN & Open a Business Bank Account

This step may not be necessary if you choose for your business structure to remain simplistic with you as the only employee. However, you will need to obtain an Employer Identification number (EIN) if you wish to open a business bank account, set up a retirement plan or hire help for your business. Opening a business bank account is advisable in order to maintain some separation from personal and business expenses, for tax and audit purposes.

Step 5: Insurance

While this step is not mandatory, it just makes good business sense given the exposure of the business owner under a sole proprietorship. Consult an insurance company to establish how best to protect yourself with coverage such as for liability, property and casualty and disability amongst others.

Final Thought

It is certainly worth considering whether Sole Proprietorship is the right business structure for you, given the risks outlined in this piece. In the event that it is the best fit for your business, registered sole proprietorship is a wonderful way of running a low maintenance small business and venturing into entrepreneurship the right way, limiting any potential issues with the IRS in future. Follow the 5 steps outlined here to start your thriving sole proprietorship!