The simplicity of running a sole proprietorship is appealing for many small business owners. To setup this type of entity you really don't need to do too much. It is much easier than running a corporation, and easier than an LLC as well. But don't worry, it's not that easy, as there are still things that you must do.
What is a sole proprietorship?
A sole proprietorship is essentially running a small business as an individual. If you had more than one person running the business, then this would be a partnership or general partnership. But just so you know, you can run a business as an individual in almost any county in the US by simply filing a sole proprietorship. You simply need to do the following things:
- Choose a business name and file a local business license in your county or city.
- Get a business banking account to deposit any checks written to your company.
- Print Business Cards
- File a DBA, if you are operating as a different name than your personal name.
Steps to becoming a Sole Proprietor
Simply put, there are a lot of risks that go along with being a sole proprietor. As we mentioned above, this is really the easiest and most simple form of business to setup. When you setup a sole proprietorship, it is all setup at the local level and not at the state or federal level. Let's cover the steps quickly:
- Register a local business license
- File a DBA if you are operating with a business name other than your personal name.
- Register for a sales tax license, or other license depending on type of business.
Reasons to not be a Sole Proprietor
As we mentioned above when you setup a sole proprietor, it isn't too difficult. However, just because it is easy, doesn't mean that it is the right business entity type for your situation. In fact, in many situation setting up a sole proprietorship is not the right thing to do. The reason that it might not be right for you can be numerous, but let's just cover a few of them:
- You have more than one business owner.
- You have a complex partnership that requires a legal document to protect your interests.
- The business has inherent risks that may lead to litigation against the owners.
- The owners have wealth that they want to separate from business risks and obligations.
What can you do to protect yourself better?
There are better ways to structure a business than being a sole proprietor. The next level up above being a sole proprietor would be to form a corporation or LLC. We have a lot of information on this site about the next level registrations. But in general when you file at the next level you will get some benefits that aren't afforded to the sole proprietorship or partnership. Here are some of the benefits:
- limited liability protection - limit the liability of the business, to exclusively business assets.
- pass through taxation - both corporations and LLCs can be structured with pass through taxation. In general, pass through taxation is good for avoiding double taxation.