What Steps Do I Need to Take to Set-Up a Sole Proprietorship?
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UPDATED: Jul 16, 2021
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A sole proprietorship is one of the easiest types of business entities to set up. For this reason alone, a sole proprietorship is often an attractive option to a small business owner. In fact, you may already be operating as a sole proprietor just by conducting business on your own. Depending on your local laws, you may not even be required to register your business. However, while registration may be unnecessary, it is a great way to protect your business. In addition to registering your business as a sole proprietorship, there are several other steps you should take along the way to ensure that you protect both your business, as well as your personal assets.
Naming Your Sole Proprietorship
As you form your sole proprietorship, you may want to start by deciding on a business name. While this may sound like a relatively easy thing to do, it could be the trickiest part of setting up a sole proprietorship. This is because you must be sure that you are not using an unavailable name. If another business entity is doing business under your desired name, then this name is unavailable. If you start doing business under an unavailable name, you will be infringing on another business’s trademark rights and subject to a trademark lawsuit. The best way to determine whether your chosen name is available is to do some research. Online searches for a business name can be very useful. However, not all businesses will appear online, so you should not stop there. Another good place to check is at your county clerk’s office, where there will be a list of fictitious or assumed business names. This is a particularly valuable resource because this list will often include business names that have not been registered with trademarks. It is important to remember that you can still infringe on someone’s trademark rights, even if they have an unregistered trademark. Another free resource to find unregistered business names is on Thomasnet.com.
Registering Your Sole Proprietorship
Once you have a name for your sole proprietorship, you are ready to register your business and apply for any necessary permits or licenses. To determine if your state requires registration, you should contact your local Small Business Administration (SBA). Your local SBA will also be able to help you with any license or permit requirements for your business. While you may find that registration is not necessary, it is always a good thing to do to protect your business name. Remember that your business name can be one of your most valuable assets. As a sole proprietor, you should also consider filing for trademark protection of your business name.
Sole Proprietorship Finances and Insurance
Next, you should open a business bank account, and obtain a business credit card. This will ensure that all business expenses are monitored properly when the time comes to pay your taxes. If you plan on having employees, you will need to obtain an Employee Identification Number (EIN) as well. Whether you have employees or not, a sole proprietorship has “pass through” taxation, which essentially means that the IRS does not distinguish between the business owner and the business itself. This means that your business taxes are paid as your personal income taxes. As you are working for yourself, you will have to pay a self-employment tax, which requires filling out the necessary forms with the IRS. A business bank account will help you keep track of the expenses that you will be able to write off at tax time. A business account will also monitor any deductible business losses, which are especially common in the early years of doing business.
As with any business entity, it is extremely important to obtain business insurance. It is especially important to insure a sole proprietorship. A drawback of owning a sole proprietorship is that the owner of the business and the business itself are legally indistinguishable so creditors can go after your personal assets. The best way to protect your business, as well as your personal assets, is to obtain business insurance policies that safeguard against various situations. Many insurance companies will have insurance packages for small businesses, which can be very cost effective.
While a sole proprietorship can be a very easy entity to set up, you may have additional questions along the way, especially when it comes to taxation, trademark protection, and personal liability. An accountant and business attorney can be valuable resources during these initial stages and throughout the life of your sole proprietorship.