What Are Sole Proprietorships?
Sole proprietorships are a type of unincorporated business where one person is the owner. This individual is responsible for all aspects of the business. So, if you have a business partner or want to run your business as a corporation, such as an LLC, you can't do it as a sole proprietorship. For many entrepreneurs, sole proprietorships are ideal because they're a relatively inexpensive way to start your own business. In fact, they're so simple and easy to set up that more than 70% of U.S. businesses are sole proprietorships.
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As a sole proprietor, you can operate under your own name or choose a pseudonym. Creating a fictitious name, also known as a DBA (doing business as) or trade name, does not make your sole proprietorship a separate entity. In other words, you'll still be fully responsible for your business's financial obligations.
Although you don't typically have to register sole proprietorships with the state, you'll need to make sure that you obtain the proper licensing and permits for your business from your local city and county offices. The paperwork you need will vary depending on the type of business you operate.
Here are some examples of businesses and people that run as sole proprietorships:
- Hair salons
- Daycare owners
- Independent contractors
- Bakers and chefs
- Graphic designers
The ease of starting a sole proprietorship and the idea of being your own boss may appeal to you, but this type of business structure isn't right for everyone. It doesn't give the owner any protection for their personal assets, but owners do reap the full rewards of all profits they make. Despite the simplicity of starting this type of business, you need to follow certain steps to ensure that you make the most of your business endeavor.
Starting a Sole Proprietorship
Sole proprietorships aren't for everyone, so you need to carefully consider whether or not this is the right business structure for you. Due to the simplicity of starting sole proprietorships, many people want to take this route. However, you should keep in mind that you can't have a partner or be considered a corporation of any kind if your business is a sole proprietorship. If you think your business may need either of these things in the future, reconsider operating as a sole proprietorship.
If you've come to the conclusion that starting a sole proprietorship is right for you, then you probably have some questions , such as "where do I begin?" After you've decided on the type of business you plan to operate, you'll want to take the following steps:
- Choose a business name. If you choose to do business as a sole proprietor, you'll have to decide whether or not you want to operate under your own name or a fictitious name. This doesn't really affect the day-to-day operations of your business, but it will help you start the process of making your sole proprietorship legitimate.
- Register your business name (or DBA). The name you choose for your business must be original, and you will need to register it through the proper channels in your area.
- Purchase a domain name. Most modern businesses need a website. So, unless you plan to forgo this, you'll need to get a domain name — note that this has to be original as well.
- Obtain licensing and permits. Once you know the name you want your business to operate under, you can go to your local city and county offices to get, fill out, and return any of the paperwork necessary to obtain the proper permits and licensing for your business. Although you aren't always required to have licensing or permits, it's a good idea to check what's needed in the area you plan to do business.
- Get an employee identification number (EIN). For sole proprietors that plan on having employees, you'll need to get an employee identification number issued to you. You can easily do this online, and it's free.
- Open a business bank account. Opening a bank account for your business is also a good idea. Although sole proprietorships aren't required to have their business and personal finances separate, doing so can simplify your life when it's time for taxes.
- Get the right insurance. Another essential aspect you shouldn't overlook as a sole proprietor is insurance. The type and amount of insurance you need will differ depending on your business. Make sure that you get the right amount of insurance for you and your business so that you're covered in the event of an emergency.
- Take care of your taxes on time. On the same note, filing and paying your taxes on time is key to running a smooth operation. If you have any questions about your taxes or you need help writing contracts, consult a lawyer or other professional.
Pros and Cons of Sole Proprietorships
As with all business structures, sole proprietorships come with benefits as well as risks. To further help you decide if this is the right type of business for you, here are some of the pros and cons you should take into consideration:
Pros of Sole Proprietorships
- Full individual ownership: As a sole proprietor, you alone are entitled to 100% of your business's profits. You can also make your own schedule and work from a location that is convenient for you and your business.
- Simple taxes: Sole proprietors aren't required to file a separate tax return for their business, which means that you can file all of your personal and business taxes on your personal tax return. This makes it easy for individuals to file their own taxes if they choose.
- Easy to start: Really, all you have to do to be considered a sole proprietor is run your business. This is what makes it so appealing to many small business owners.
Cons of Sole Proprietorships
- No personal protection: When you operate your business as a sole proprietor, you and your business are one and the same. If someone sues you, your business assets aren't protected. The same thing is true if someone sues your business — they can take your personal assets. So, anyone with a lot of personal assets will probably want to consider another business structure.
- Combined income: Having your personal and business income combined can create tricky situations when it comes to running a business. This is especially true if you want to sell your business down the road. Proving profits and losses for your business is difficult on a personal tax return.
- Finding new business: For those who choose to operate their sole proprietorship under their own name, finding new business can be challenging. Additionally, because your business is attached to your name rather than being a separate entity, it can make advertising through certain channels more difficult.
Starting a new business is exciting, but deciding which business structure is right for you can be a challenge. It will depend on the type of business you want to start and what you see for your business in the future. Use this information to help you decide if a sole proprietorship is right for you.