How to Start a Sole Proprietorship

Sole proprietorships are so easy to establish that you may already own one without realizing it -- all the more reason for getting set up properly so that you can make more money, minimize taxes, and avoid potential problems.

 

A sole proprietorship is a one-person business that, unlike corporations and limited liability companies (LLCs), doesn't even have to be registered with the state in order to exist. There were more than 22.6 million sole proprietorships in the U.S. in 2008, according to the Internal Revenue Service (IRS). And even though this type of business is easy to set up, it's also easy to ignore local registration requirements, business licenses, and paying taxes on your income.

"It's by far the most common type of business, the easiest to set up, and the one that most businesses end up starting as," says Jerry Osteryoung, director of outreach at the Jim Moran Institute at Florida State University's College of Business. "You can always migrate up to an LLC or a corporation, but when first starting a business you need to make sure it's easy to start."

The following guide explains how to set up a sole proprietorship, its financial structure, and the potential drawbacks of starting one.




Setting Up a Sole Proprietorship

Once you have an idea for a sole proprietorship, whether it means selling a product or providing a service, make the decision to run your activity like a business. "Be prepared to devote time, use business methods, and get set up properly so you can make more money, minimize taxes, and avoid potential problems," says Barbara Weltman, a tax and business attorney and author of such books as J.K. Lasser's Small Business Taxes (Wiley 2010).




Become a business. To be a sole proprietorship, you do not have to take any formal or legal steps at the federal, state, or local level, Weltman says. "As long as you are the only owner, you automatically become a sole proprietorship by conducting business," she adds.




Depending upon the city or municipality where you set up shop, you may need to register your business or obtain business and/or occupancy licenses. Osteryoung suggests contacting the nearest government-sponsored Small Business Development Center (SBDC). The Small Business Administration maintains an SBDC locator. They can usually provide you with step-by-step instructions on how to set up a sole proprietorship in compliance with all local laws and regulations.




One key component to starting a business is writing a business plan. The plan serves as a roadmap so you know the order in which to implement actions necessary to start and grow the business, Weltman says. It's also useful in making you focus on various aspects of the business, such as obtaining start-up capital and deciding whether or not you will be selling through the Web.




Choose a name. A name can describe in one or a few words what the business is all about. Think carefully in choosing a name when you start up a sole proprietorship and then protect it.




"You have to make sure the name isn't being used by anyone else," Osteryoung says.



Pick a domain name. If you plan to create a website, as most businesses should, be sure that you select a domain name -- hopefully one that is the same as your business name, Weltman says. Even if you don't set up a website immediately, reserve the name by registering your site. Check availability of the name you want to use through Register.com.
Register your name. If you operate the business under your name, as do many freelance writers and business consultants, you can skip this step. However, if you operate under a fictitious name, you should register it -- you're required to and it prevents someone else from using the same name in your area, Weltman says. "For example, if Jane Jones runs a dog walking business under the name Pampered Puppies, she should file with her local government that she is 'doing business as' (DBA) this fictitious name," she adds. "Check with your local government -- often the county -- to make sure the name is not already being used by another business."
Trademark your name. "While not mandatory, it's often a good idea to gain legal protection for a business name so that no one else can use it," Weltman says. This is important if your name becomes a brand. Learn about trademark protection through the U.S. Patent and Trademark Office.