The sole proprietorship is an incredibly popular type of business that many business owners choose to use when starting a company. It is an easy process that requires only a few simple steps to start.
Is a sole proprietorship a business?
The sole proprietorship is one type of business structure that is the IRS's standard classification for any company that was founded by an individual. Being a sole proprietor means that both your business and you have the same identity, meaning that the business doesn't have a separate legal entity. As the sole proprietor, you are the sole owner and you share all the legal responsibility when your business is sued or is facing financial problems. This is one of the greatest risks of a sole proprietorship.
A few examples of sole proprietorships.
Here are a few examples of professionals who could create sole proprietorships in order to provide their services to clients as well as clients:
- Chefs
- Accountants
- Writers
- Personal trainers
- Landscapers
- Editors
It is important to note that sole proprietorships are companies that share all legal liability with the business's owner. In the event that the business faces legal action, the owner's personal assets could be at risk.
How to start a sole proprietorship
It is easy to establish and up and running. Since you don't need to declare your business to the state, there aren't any formal steps to take. There are a few things you could submit a request for, based on specific changes you'd want to implement in your company. Here are some suggestions you might be required to follow:
Step 1. Change your company name.
If you wish for your business legally to have an alternative name to your own, then you need to create what's called a DBA. If you are a sole proprietor, the sole proprietor is legally obliged to use their own identity as the domain's name, unless they choose to change their name.
If you want to alter the title of your sole ownership to a brand name then you need to apply for a doing-business-as license that gives you the possibility of choosing a new name. The Doing-business-as (DBA) form with the appropriate state. Usually, it is by contacting the secretary of state's department however the particular agency may differ between states. A DBA application will be priced between $50 and $100 based on the state.
When picking a name you should ensure that it's not already used by another person. Also, you shouldn't select a name too similar to another's. To find out if the name you're interested in is available, check the U.S. Patent and Trademark Office website or search your local DBA registry.
Step 2: Find an employer identification number.
If you're a sole proprietor you'll also require an employee identification number (EIN) that the IRS utilizes to identify your business when tax payments are made. Some banks will need an EIN to establish a business bank account.
Step 3. Open a business bank account.
The fact that you have a separate bank account from your personal one can help to ensure that your finances are organized and separate from your private money.
"This is a requirement in order to keep your business funds separate from your personal finances," said Julia Brookes a Now Loans finance consultant. "This will give you more clarity on your earnings and improves your credibility with banks in the event that you have to get an loan."
As sole proprietors, the business's assets are not legally separate in relation to your own personal wealth like they would be in an LLC as an example. there isn't any limitation of responsibility that comes with sole proprietorships.
Step 4: Make sure you have the correct documentation required in your state.
Depending on your field of work depending on your industry, you might require certain permits, business licenses or zoning approvals to operate legally. Examine the state's requirements for building permits or rules for the type of business you operate to ensure that you are in compliance with all laws and regulations applicable to your business.
Important note: There aren't any mandatory steps you have to complete to be sole proprietorship. However you might need to submit a do-business-as-application and obtain an employee identification number in order to be registered as a business official.
Business entities of various types to take into consideration
Apart from sole proprietorships however, there are many different business entities that may be better suited to your business. They offer only limited liability, which means your company's assets are independent of the personal belongings of you, safeguarding your personal assets from legal action or fines.
Company limited liability (LLC)
In contrast to sole proprietorships, this structure of business protects you personal property from any issues the LLC could face, which means that you don't have to be personally liable in the event that your company is threatened with legal action. A LLC is also referred to as an "pass-through entity" because the business's earnings aren't subject to corporate tax on income. Instead, the profits will be taxed as personal earnings only when they are paid to the owners or the owner. This means that company profits "passes over" to owners, and will then be subjected to the personal tax rates.
Partnership
A partnership is the case when two or more persons have ownership in a business.
"If there are friends who would like to pool their money, you could choose to create an association," said Jeremy Harrison the co-founder of Hustle Life. "It can be a little complex because you must meet with the partners to agree on the terms and conditions of the agreement." Related post: How To Write an Effective Partnership Agreement]
Corporations
They are considered separate organizations from owners. There are five types of corporations including C companies, S corporations B corporations close corporations, and non-profit corporations. Each type of corporation has its own requirements for the governance organization and taxes.
Important takeaway: In along with sole proprietorships additional kinds of business entities are limited liability companies, partnerships , and corporations.
What are the advantages of sole proprietorship?
A lot of businesses begin as sole proprietorships and there's a reason to choose this route It's extremely simple and affordable to run.
"There are no costs for establishing your business and you don't have to renew your business's entity every year in the eyes of the State," said Matt Jensen who is certified public accountant at Cook Martin Poulson. There aren't any requirements for annual owner meetings , or filings with states. And in general, there's less administrative workto be done, the accountant explained.
What are the negatives of sole proprietorship?
Although a sole proprietorship can be one of the simplest businesses, it imposes the burden of responsibility on the business's owners. It provides no legal protection for the personal assets of your business as well as sole proprietors.
"If an owner of a business were sued, the business owners could lose their car as well as their home due to the business's risk," Jensen told Business News Daily.
The sole proprietorship poses security issues. "Another problem is that if a business identification number is required the owner must provide the Social Security number, greatly increasing the likelihood of identity fraud" Jensen said.
Another disadvantage one of the disadvantages is that sole proprietors aren't qualified for certain tax breaks or small business loans. However, they may be eligible for tax benefits for self-employed persons.
The main takeaway is that sole proprietorships don't provide legal protection to the personal assets of business owners and aren't eligible to receive certain business tax breaks , or business loans.
What is the tax impact of sole proprietorships?
If you file the tax return as a sole proprietorship you must report your business's earnings as well as losses in your tax return for personal. Additionally, you must submit the schedule C, "Profit or Loss from the Business" in your IRS 1040 tax filing. This form helps to record the revenue and expenses of your company.
"A sole proprietorship doesn't need the obligation to submit a separate business return for tax purposes," Jensen said. "A business tax schedule is attached to the personal tax filing."
Sole proprietorship income is treated as personal income. This is the reason it's included on your tax return for personal use.
It is also possible to submit Schedule C-EZ that documents your profit from your business. Since an owner who is solely responsible for the business's operations can be as both an employer and an employee, the sole proprietor is accountable for both the employee and employer portions in Social Security and Medicare taxes via the form SE, "Self-Employment Tax." The employer part of the tax may claim a deduction from taxes making your tax return, however.
Sole proprietorship FAQs
Do you have the ability to employ employees even if you're sole owner?
According to LegalZoom the sole proprietor may employ employees, however you need to be aware of not violating any local or state laws. In addition, you must first get an employee identity number (EIN). The EIN is required for tax purposes and sole proprietors cannot make use of his or her Social Security number in place of a valid EIN.
What is the different between the sole proprietor and self-employed person?
Self-employed and sole proprietor refer to the same thing. Sole proprietors are the sole - and only one who manages their own business. A sole proprietor isn't identical to the term "independent contractor. Independent contractors typically work with a different company or companies, like an artistic professional, such as writers or graphic artists.
Independent contractors will not be able to hold taxes from any payment. Sole proprietors are accountable for paying the taxes associated with their business.
What are the risks to insurance of creating sole proprietorship?
Sole proprietors do not have protection from liabilities or debts that the company may incur. Due to personal responsibility the sole proprietors are required to take out some form of insurance to protect themselves in instance of lawsuits. The sole proprietor will want to take out small-business insurance or a general liability insurance policy.
Is a sole-proprietor able to earn an income?
A sole proprietor is not entitled to an income. This means that you aren't able to pay yourself a salary , and be tax-deductible for the amount you earn. Your salary is contingent on the charges you receive for the services or products that you offer to your clients.