Small Business Saturday: The Sole Proprietorship

Today’s post is about getting started as a sole proprietor.

First, I need to add the disclaimer that Sewing Mamas LLC is not able to provide legal advice and any legal decisions you make should be made after careful research and in consultation with your own attorney and tax adviser. Laws vary from state to state and the best course of action depends your specific circumstances. The information presented herein is provided for informational purposes only.

(photo credit David Lofink, original image link, licensed under CC BY 2.0)

There are several different types of business structures to choose from when you decide to get started. The most common is the sole proprietorship.

A sole proprietorship is easy to form. If you are the only owner, your business is automatically a sole proprietorship if you start up and take no other action to formalize a business structure.

Now, if you are thinking, “Wow, that sounds easy! I’ll do that!” Hang on a minute.

Just because your business is a sole proprietorship does not mean your work in setting up the business is complete.

You still need to get the necessary license and permits, which vary depending on your location and industry ~ Here is a link to the Small Business Administration’s licensing and permits information.

If you want to operate under a name other than your own, you will need to file an assumed name, also called a fictitious name, or “doing business as” (DBA).
Here is an example: Sue Smith wants to sell her hand sewn sea shells. If she does business under her name only, she does not need to register a DBA. However, if she wants to sell her products under the name Sue’s Shells, she would need to register that assumed name.

Sue would want to register that name as one of the first things when setting up shop. This is the name she would use on official government forms, such as her application for an employer tax id, which she may want even if she does not have any employees. (What? Yes, really. More on that in a future post.) The DBA paperwork will also be needed to set up a business account at the bank for Sue’s Shells.

However, this is another instance where you will need to check with your state, as not all states require registration of assumed names, though many do. Another thing to keep in mind is that in many states, filing for an assumed name does not protect the name from being used by others. In either situation, you may want to see if your state offers the option of filing for a trade name.

Check with your state as well as the federal trademark registry to ensure your business name is unique. And for heaven’s sake, do a google search on the name you want to use first! Also, consider the initials of your business name. You do not want them to spell anything foul.

Starting a sole proprietorship may seem like a very straightforward option, and in many ways, it is. Since you are the business, the income (and expenses) from that business is reported on your personal income taxes, using a Schedule C form with the standard 1040 tax form. You are also responsible for self-employment taxes.

If the products you are selling are taxable, you must also register with your state to collect sales tax and then remit that tax to the state. This is separate from your income tax reporting.

As with most things that seem simple, there is a downside to this option. Since you are the business, you are also personally responsible for the actions of the business. This unlimited liability means that you can be held personally responsible for ALL the debts and other business obligations, even those liabilities that are the result of actions of your employees. It is strongly recommended to buy a general liability insurance policy to help protect yourself financially.

Hopefully you have a better idea of the basics of a sole proprietorship. Next Saturday, we will talk about Limited Liability Companies (LLC). They sound much more scary and formally structured than they are. An LLC can be a great option, even if you are the only member of the company.

Kelly