Governing law of sole proprietorship: If you own a sole proprietorship, you do not have to register it as a limited liability company (LLC), fill out special forms, or pay any fees to start your business. However, you must comply with local and state laws regarding business registration, licensing, and permit laws based on where you live.

What Is a Sole Proprietorship

A sole proprietorship is a type of business run by only one person. As such, it is not registered as a corporation or limited-liability company (LLC).

Since a sole proprietorship is relatively simple to create, you might be a sole proprietor and not know it. For example, if you are a freelance graphic designer, a woodworker, an accountant, or you do any one-person job that earns you a commission, you are a sole proprietor because you are self-employed.

Navigating the Laws Governing Sole Proprietorships

You might have to register your sole proprietorship in your city or county. If required to register your business, declare that you are running a sole proprietorship. In any case, you will be required to pay a minimum tax. Once you register, you will receive a business license and tax registration certificate.

In addition, you may be required to obtain the following, based on your business activities:

  • A seller's license from the state you live in.
  • An operation license, for a profession that requires one.
  • A zoning permit from your local zoning board.
  • Registration for the name of your business, if it differs from your own name.
  • An employee identification number (EIN) from the Internal Revenue Service — but only if you have employees, if you have a certified retirement plan, or if you pay excise taxes.

If you choose to use a fictitious name — often referred to as a DBA (doing business as) — for your business, you might have to register that name in your state or a local agency. Just keep in mind that your DBA is not the legal name for your business. Your name is the legal name for the business.

What You Must Also Consider When Creating a Sole Proprietorship

Ultimately, you will need to be careful because you will have added responsibilities regarding the following: debts, taxes, and lawsuits. You will need to conduct yourself professionally and obey the law.

  • Regarding Debt: You are entirely responsible for any debts incurred by your business.
  • Regarding Taxes: Legally, you and your sole proprietorship are one and the same, so your business is a “pass-through” entity with regard to paying taxes. However, you must do the following to comply with tax law:
    • Report all earnings and expenses connected to your business if they total more than $400.
    • Fill out a 1040 tax return with a Schedule C form.
    • Pay a self-employment tax, which includes payments to Social Security and Medicare.
    • Pay your taxes during each quarter (every three months during the year).
    • If you happen to own more than one sole proprietorship, you only have to report your taxes once a year.
  • Regarding Lawsuits: If you failed to pay a supplier, default on a debt, or you lose a lawsuit, the person you owe can take your personal assets, like your home. To protect against these losses, you are encouraged to buy liability insurance.

Advantages and Disadvantages of Owning a Sole Proprietorship

While you consider starting a sole proprietorship, you must weigh the benefits and drawbacks of such a business.

Advantages:

  • It is very easy to create a proprietorship.
  • The business grants you a great deal of flexibility.
  • You have more control over your business than you would have if you ran a full-fledged company.
  • You will not have to keep business records— but you should keep financial records to comply with taxes.

Disadvantages:

  • Sole proprietorships are more likely to fail because they often start with no preparation or planning.
  • As mentioned above, you will be personally liable for any losses, debts, or injuries connected to your business.
  • If you get married, extra property laws apply.
  • Unfortunately, a sole proprietorship dies with the owner, so the business cannot be inherited — unless a will specifies what happens to assets connected to the business.

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