Checklist: Starting a Sole Proprietorship
Starting a sole proprietorship is a popular choice among entrepreneurs eager to have their own business. This business entity is straightforward and offers the advantage of direct control for the sole owner. Like any new business venture, there are steps to take to ensure it operates legally and efficiently.
This guide is for those considering starting this unincorporated business model. This article highlights the main steps in starting a sole proprietorship. Keep in mind that your own start-up requirements might vary from the list below. This depends on the specific type of business you are in. It is also affected by where your business is located and other factors.
Let's look at the most important steps for starting a sole proprietorship.
Decide on a Business Name
When you start a sole proprietorship, choosing a business name is your first step. Your business name can have a significant impact on branding and marketing. Many sole proprietors simply do business as themselves. The name of your business can be your own personal name or a fictitious business name (also called a DBA, which stands for "doing business as").
This step is easy if you're planning to operate under your own name, but many entrepreneurs choose a trade name that reflects their business activities.
Remember, your chosen name is how customers will recognize your business. Select a name that is catchy and relevant. There's no need to rush the process. It's suggested that you choose more than one possible business name and then think about it for a few days before deciding. As a rule of thumb, you want your name to be somewhat unique and memorable but not at the risk of confusing potential customers. You also will want a name that is available.
Search Availability of Name(s)
Before you get too attached to a business name, check its availability. It's essential to ensure no other business operates under the same name, especially in your area. You will want to ensure that your chosen business name is not trademarked or used as an Internet domain name by another entity. If you choose to do business as your legal name, this shouldn't be a problem.
Check to see whether your ideas are already on the list of fictitious or assumed business names on record with your county clerk or Secretary of State. The Small Business Administration (SBA) and local zoning offices can provide guidance in this area. There are multiple sources for searching the availability of a business name, including the U.S. Patent and Trademark Office's trademark search tool, but you may want to start with just a simple Internet search.
Even if the name is not taken by another business, your general search may reveal that the chosen name already has associations that would be detrimental to your business or prove confusing to customers. This step also helps in avoiding potential legal disputes later on.
Register Your Name
Once you've chosen and confirmed the availability of your business name, it's time to register it. If you're using your own name, you may not need to register it.
If you are registering as a sole proprietor but doing business under another name, you will need to register any such fictitious business names or DBAs along with your legal business name, which is typically your full legal name. This can be done through your state's business registration office. It's always a good idea to check with the office to see if you need to register.
Registering not only your legal business name but also your DBA as well provides certain advantages. For instance, once your name is registered, it can't be registered by another company. If another entity tries to use this name, your registration will make it easier to file a legal action. Registering protects your trade name from being used by others in your state.
Obtain Business Licenses and Permits
You will need to obtain all necessary licenses and permits from the federal government, your state government, and your local government. Different businesses require different types of permits and licenses. All businesses, whether sole proprietors or limited liability companies (LLCs), require specific licenses and permits for certain types of businesses. These vary based on your business activity and location.
For example, a sole proprietor opening a hot dog cart in New York City probably won't need any federal licenses, but they may need to apply for a Mobile Food Vendor Personal License, schedule a health inspection, and pay a fee for a two-year license.
Check with your local government and the SBA for information about what you need for your new business. Additionally, sales tax permits might be required if you're selling goods. See FindLaw's Sole Proprietorships and Choosing a Legal Structure sections for more articles and resources.
Set Up a Business Bank Account
Keep your personal finances and business income separate. You should open a business bank account. Having a separate bank account ensures your personal assets and business assets do not commingle. This can help prevent complications, especially when tax season comes around. For tax purposes, having a distinct business account helps in accurate record-keeping.
Many banks require a federal employer identification number (EIN) from the Internal Revenue Service (IRS), to open a bank account, even if you're the only employee. While some small business owners use their social security number, obtaining a federal EIN is more professional. It also helps separate business from personal activities.
Understand Your Tax Obligations
Sole proprietorships, as a business structure, have specific tax obligations. Sole proprietorships are not separate entities from the owners. All business income is reported on your personal tax return using Schedule C. Entrepreneurs are responsible for paying self-employment tax, which covers items like Social Security and Medicare.
Stay informed about business tax rates and make estimated tax payments throughout the year. The IRS and the local tax agencies offer resources and FAQs to guide independent contractors and business owners with their personal income tax.
Consider Business Insurance
Protecting your business is crucial. Business insurance can safeguard against unforeseen events. This can help ensure your business activities continue smoothly. Insurance can offer peace of mind. It can help you know that you're protected from potential significant financial losses.
Especially for sole proprietors, where personal assets might be at risk, having the right insurance coverage becomes an essential safety net against unexpected setbacks. Consult insurance experts to understand which policies suit your business best.
Get a Legal Review To Ensure Your Business Starts off on Solid Ground
A sole proprietorship offers the least amount of complication in terms of start-up requirements when compared with other types of business organizations (i.e. corporation, partnership, etc.). But at the same time, sole proprietors are exposed to personal liability for debts and court judgments. To ensure that your new sole proprietorship covers all legal bases and has the best chance for success before opening for business, talk to an attorney.
Contact a local business organization attorney who can help you select the right structure for your type of business and guide you through the process.
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