How to Form a Sole Proprietorship

If you’re thinking about opening your own business, forming a sole proprietorship is likely your easiest option.

As a sole proprietor, you have full control over the business; there is no legal distinction between you and the business, and you receive all the profits while being responsible for all its debts and liabilities. In short, as soon as you start your business activities, you are a sole proprietor by default. However, there are a few steps you need to take in order to make it all legal.

Forming a sole proprietorship is relatively easy and inexpensive, and once you have formed one, you are free to move forward with business objectives, such as hiring staff, opening a storefront and promoting your business.

Follow the simple steps below to become a sole proprietor, or click here to see a general overview of a sole proprietorship’s pros and cons. To see if another type of business is a better option for you, see our video series on choosing the right business entity.

1. Pick Your Name

If you want to use a name for your business that is not your personal name, you need to register for a “Doing Business As” (DBA) name. Many states require you to do so before you can obtain your permits and licenses, and banks often require you to operate under a DBA before you can cut and cash business checks.

You have to choose an original name for your business, so make sure your name is available before spending the time trying to register your DBA. If your state requires a DBA, a quick call to your county or state clerk’s office will tell you if the name is already taken.

It’s also a good idea to trademark your name to ensure that no other business uses or will use the same name. Also, consider purchasing a domain name if you plan to create a website for your business—even if you aren’t quite ready to build the site yet—to ensure your preferred name is reserved when you’re ready to launch your site.

2. Obtain Your Permits and Licenses

Regulations vary from state to state, but it’s possible that you will need to obtain licenses and permits on the federal, state and local levels. Resources like QuickBooks Licenses can help you find and obtain all your necessary licenses and permits.

3. Establish Separate Finances

You will want to set up a separate bank account and open a business credit card to use only for business expenses. Doing so will make it much easier for you to track your expenses and income, which will simplify your taxes at the end of the year.

Failure to separate your business and personal expenses can also put you at risk for an audit during tax season.

4. Report Your Taxes Correctly

If you have no employees, you and your business are legally the same, so you can report your income with an IRS Schedule C or Schedule C-EZ, which is part of  Form 1040 , using your Social Security number.

However, if you hire staff or want to set up a retirement plan, you will need to obtain a federal employer identification number (EIN) and use that to file your taxes. Also, as an employer, keep in mind that you should file your taxes every quarter, as opposed to yearly filings for employees. Lastly, be sure to do your research and see if your state requires you to charge any sales tax.

While becoming a sole proprietor is relatively easy, it’s also a bit risky, as you maintain full liability for all its debts. As your business progresses, it may be in your best interest to create a corporation or limited liability company (LLC) to protect your personal assets from business liabilities.

To see the pros and cons of a sole proprietorship, click here. For more info on different types of business entities, see our videos on selecting the right business formation.

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