How To Set Up a Sole Proprietorship
By Jade Yeban, J.D. | Legally reviewed by Aviana Cooper, Esq. | Last reviewed June 14, 2024
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Venturing into the world of entrepreneurship is both thrilling and challenging. Among the myriad of decisions facing new business owners, selecting the right business structure is paramount. A sole proprietorship is one of the most common and straightforward business entities.
Sole proprietorships are often the first choice for many budding small business entrepreneurs. It provides sole proprietors with the complete control and decision-making power they desire when starting their journey. If you're considering this route for your new business, understanding the steps involved is crucial.
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This guide will walk you through the process of establishing a sole proprietorship. It helps ensure you are well-prepared to take on the exciting world of business ownership.
Step 1: Decide on a Business Name
When starting a sole proprietorship, the first thing you'll need to do is pick a business name. This name is what customers and clients will recognize your small business by. Some entrepreneurs use their own names. Others create a unique name. If you want to do business under a name different from your personal name, you'll need a doing business as (DBA) or fictitious name.
Always ensure your chosen business name isn't already in use by doing either a simple Internet search or checking with the United States Patent and Trademark Office. Doing this can prevent legal issues later on. This shouldn't be a problem if you are using your legal name. Remember, your business name is vital. It reflects your brand and business type.
Step 2: Register the Business Name
Once you've chosen a business name, you need to register it. This is crucial for new business owners. This process may vary by state. Check with your state laws. To register a DBA, visit your local secretary of state or local government office's website. Registering a DBA, also known as a trade name, allows entrepreneurs to use the business name. A registered name establishes your business's identity, ensuring you have the sole rights to that name in your region.
Step 3: Obtain an Employer Identification Number
Even if you're the sole owner of your business, it's often a good idea to get a Federal Employer Identification Number (EIN) from the Internal Revenue Service (IRS). Some small business owners use their social security numbers for tax purposes. An EIN provides an added layer of privacy. The IRS issues this number, and it's used for business tax purposes. Additionally, many banks require an EIN to open a business bank account.
Step 4: Open a Business Bank Account
To maintain complete control over your business, it's essential to separate your personal assets separate from your business income. This is achieved by opening a business bank account. Keep your personal finances in your other bank account. Having a dedicated bank account for your sole proprietorship not only helps organize finances but also makes it easier during tax season.
Step 5: Obtain Necessary Business Licenses and Permits
Your type of business and where you operate will dictate the kind of business license or permit you need. These licenses allow entrepreneurs to legally conduct their business activities. Check with your local government and state to see which licenses are required. Whether you're an independent contractor or have a startup, it's essential to stay compliant.
Step 6: Understand Your Tax Responsibilities
As a sole proprietor, you are responsible for all business income and expenses. This is because your business is not legally a separate entity. Your business income and expenses will be reported on Schedule C of your personal income tax return.
Sole proprietors also face self-employment tax, which covers Medicare and Social Security. The IRS requires estimated tax payments throughout the year based on your expected income and tax rate. Staying updated with federal tax obligations and setting money aside for tax payments is crucial for business owners. Get help with your personal tax return from a CPA if you need help.
Step 7: Consider Business Insurance
While a sole proprietorship offers complete control and decision-making authority, it does not offer liability protection like a limited liability company (LLC). This means your personal assets could be at risk if your business faces debts or lawsuits. To protect yourself, consider getting business insurance. Different business types may require different insurance coverage. Consult with an insurance agent familiar with small businesses to learn more.
Step 8: Plan for Your Business's Future
Launching a new business is exciting. Long-term success often requires planning. A business plan outlines your business goals and the strategies to achieve them. This document can also be beneficial if you seek funding or partnerships. As your business grows, regularly revisit and revise your business plan to adapt to changing circumstances.
Step 9: Promote Your Business
After you start a sole proprietorship, it's time to attract customers. Consider creating a website with a unique domain name to establish an online presence. Marketing strategies, from social media promotions to local advertisements, can be effective. Word of mouth, especially for local businesses, can also be a powerful tool. As the sole owner, promoting your business effectively can lead to growth and success.
Step 10: Get Legal Help
Starting a sole proprietorship might seem straightforward, but various legal nuances can impact your business. Whether it's about personal liability, the distinction between sole proprietorship vs. LLC, or business structures, getting legal advice is always a good idea. A lawyer can provide guidance tailored to your business's unique needs. They can help ensure you are on the right path.
Talk to a business organization lawyer about sole proprietorships today.
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