How to start a sole pro­pri­etor­ship

Anyone looking to take the leap and become self-employed can start a sole pro­pri­etor­ship in the US. You don’t need a massive budget nor any potential business partners to get going. Whether you’re in the business of selling or providing a service – once you know what you want to do, it’s easy to become a sole pro­pri­etor. An estimated 23 million busi­ness­es in the US are sole pro­pri­etor­ships. But it’s important to un­der­stand the re­quire­ments, taxation rules and li­a­bil­i­ties of a sole pro­pri­etor­ship.

A sole pro­pri­etor­ship is a legal business form that is set up and main­tained by a single person. But before you opt for a sole pro­pri­etor­ship, you should consider the al­ter­na­tives such as a cor­po­ra­tion or limited liability company (LLC), both of which can be run by a single person. The main dif­fer­ence between a sole pro­pri­etor­ship and the cor­po­ra­tion and LLC are that the latter exist as separate legal entities from the owner. As a sole pro­pri­etor, you’re also fully liable for your business. Neither of the three options requires you to have any capital to launch with. However, although there are legal benefits to reg­is­ter­ing as a cor­po­ra­tion or LLC, the process requires con­sid­er­ably more paperwork and time. Because of that, sole pro­pri­etor­ships are still the most common legal business structure in the US.

Although you can always revert to a different legal business structure later on, it’s worth having an overview of the ad­van­tages and dis­ad­van­tages of a sole pro­pri­etor­ship. You may find that a cor­po­ra­tion or LLC suits your business needs a little better.

There are many different types of in­dus­tries in which you can become a sole pro­pri­etor. For example, you could start a catering business, run a tutoring service, offer your skills as an ac­coun­tant or land­scap­er. You may even realize that you’re already running your current business as a sole pro­pri­etor. That’s because setting up a sole pro­pri­etor­ship is so easy to do in the US. If you’re planning to start a sole pro­pri­etor­ship, here’s what you need to do.

Most sole pro­pri­etors operate their business under their own name. But it can be worth choosing a more dedicated name that ac­cu­rate­ly describes what services or products your company provides. A strong name is one that reflects your business purpose, is easy to remember and that is not reg­is­tered already. Once you’ve made your choice, you can register a web domain under the name. Most busi­ness­es today have their own website and social media presences. If your business name is not your actual name, you should register it with your local authority as “doing business as”. You can also trademark a name if you feel strongly about it or your business idea.

Although it’s not tech­ni­cal­ly necessary to have a separate business account, it could save you some hassle down the line. Keeping your business finances separate from your personal finances makes it easier to retain an overview of profits and losses. You can open a separate business account and get a dedicated business credit card, which you only use for your company expenses.

For certain business types, you may need to register for an op­er­a­tional license or a permit to operate. For example, if your business is within con­struc­tion, childcare or law, you must get an op­er­a­tional license. If you sell re­strict­ed items such as alcohol, firearms or tobacco products, you must also register for a federal license. In certain cases, where you’re using land to grow crops, you need a permit. The sale of food and health items also requires you to register for a permit.

In most cases, sole pro­pri­etors’ accounts are fairly simple. If, for example, you’re a graphic designer, you may only work with a few clients a year and write invoices to each at the end of each month or when a project is finished. It’s a good idea to keep a record of your invoices and any expenses (for example, new software or hardware you need to operate your business) using an Excel spread­sheet. If you write a lot of invoices, employ con­trac­tors or need more advanced ac­count­ing tools, you can try one of many useful ac­count­ing apps.

Just like any other business, sole pro­pri­etors must pay taxes. The dif­fer­ence between being employed and being self-employed is that you will be required to list your profits but also your losses when sub­mit­ting the 1040 form to the Internal Revenue Service (IRS). You can deduct business expenses and will be taxed on your net income. It’s important that through­out the year you set aside enough money to pay your taxes. If your income from self-em­ploy­ment exceeds $400 a year, you will be required to pay taxes of 15.3% on the remaining net income. The tax is composed of social security and Medicare.

If your business has employees, you must also pay em­ploy­ment taxes on their income. These can be deducted as business expenses.

Although there are lots of benefits of being a sole trader, it is an un­in­cor­po­rat­ed business entity and there are several risks involved. Firstly, sole pro­pri­etors are per­son­al­ly liable for any debts the business produces. They cannot file for bank­rupt­cy and depending on the amount of debt owed, may have to sell personal assets to settle overdue payments. Where sole pro­pri­etors put every­thing on the line, they may end up losing every­thing in a worst-case scenario.

Because in­vest­ments are harder to secure under a sole pro­pri­etor­ship, there’s a danger that you may lose your own money in the long run where a business idea doesn’t take off. Al­ter­na­tive­ly, you may not be able to sustain your business if you cannot secure funding.

You can also be held ac­count­able for any injuries you may cause during business op­er­a­tions. It’s best to purchase liability insurance if your business involves physical ac­tiv­i­ties that could po­ten­tial­ly harm yourself or others.

Starting a business is risky, no matter which legal structure you choose. If you want to test the waters with an idea that doesn’t require too much cash in­vest­ment, sole pro­pri­etor­ships offer a good structure. Nev­er­the­less, you should create a realistic business plan that assesses any com­peti­tors as well as your potential customers. Having an in-depth un­der­stand­ing of your potential customers will make it easier to weigh the risks and determine how likely you are to succeed. Whether you ul­ti­mate­ly do succeed depends on your goals, your efforts and of course the market.

The following steps are necessary to set up a sole pro­pri­etor­ship:

1. Business idea and drafting a business plan
2. Deciding on a name for your business
3. Opening a business bank account
4. Reg­is­ter­ing your trademark (where necessary)
5. Where ap­pro­pri­ate, reg­is­ter­ing/applying for permits and business licenses
6. Keeping accounts (you can download an ac­count­ing app or software to help with invoicing)
7. Pay taxes

Click here for important legal dis­claimers.