If you’ve been feeling an inner pull to start your own business, then you are in the right place. Learn how to start a sole proprietorship in as little as seven steps. Follow our simple guide to register your business and get started quickly and easily.
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Is a Sole Proprietorship Right for You?
If you want to start your own business but don’t necessarily want to form a limited liability company (LLC) or partnership, starting a sole proprietorship might be the best fit for you. Maybe you have a business idea and want to start small to see if it could work. A sole proprietorship is the easiest and fastest way to begin. Maybe you still have a full-time job and want to freelance on the side, render a service or sell a product. As long as you are the only owner you do not have to take formal action to form a sole proprietorship. As with all businesses, however, it is important to obtain any necessary licenses and permits needed to operate. If you’re on the fence between the two types of business formation check out the full Sole Proprietorship vs. LLC comparison.
7 Steps to Start a Sole Proprietorship
The process of registering a business as a sole proprietorship doesn’t have to be complicated. In fact, it can be done in just seven simple steps, from choosing a business name and registering your doing business as (DBA) name with your state to applying for an EIN number and any required licensing.
Here’s how to start a sole proprietorship in seven steps:
Step 1. Decide on a Business Name
Coming up with a business name can be exciting―it is a representation of you and the product or service you are providing. People will associate you with this name, so it’s important it represents your business well.
When you start a sole proprietorship, your legal name is, by default, your business name, so it simplifies the process. Meanwhile, you have the option to create a separate business name, otherwise referred to as DBA.
Step 2. Register Your Business DBA Name
If you opt to use your full legal name for your business, no further action is required. You may operate without registering and using your Social Security number for tax purposes.
However, many sole proprietors use a trade name for marketing purposes or to keep their personal identities separate from their business. If you plan to use any name other than your personal name, you’ll register a DBA name. For instance, Jane Smith doing business as “The Wedding Seamstress.” You are still operating as a sole proprietor but choosing to run your business under your business name. Make sure that no other business has your name by doing a search within your jurisdiction.
Requirements to file a DBA vary from state to state, and you may need to file at either the state or local level. Check with the office of the secretary of state or county clerk’s office where your business is located.
Step 3. Buy and Register a Domain Name
A great way to market your business is to create a website, which is considered your online home base. This is your greatest digital asset―one where customers can learn about your products or services.
Now that you have the perfect name for your business, checked to make sure no other business has the same name and filed for your DBA, you’re ready to buy your domain name.
The domain name is a unique URL address used to direct traffic to a specific website. In this case, the domain name will be specific to your business name or catchphrase. Depending on which domain registrar you go with, you will need to do a name search to make sure it’s available. It’s best to keep the domain name as close to your business name as possible.
Step 4. Apply For An EIN
After you file for a DBA, you can also file for an employer identification number (EIN) on the IRS website. The EIN identifies your business for tax purposes. If you file for an EIN online, you will receive an EIN immediately after the application is completed.
The IRS doesn’t require sole proprietors to have an EIN unless they have employees or pay excise taxes. You can use your Social Security number instead. However, you will need an EIN if you hire employees and you may be asked to provide one to open a business bank account.
Step 5. Obtain Business License and Permits
Each state has different licensing requirements for specific industries and professions. A few industries need federal licenses or permits. According to your business type, you may need to register for an operational license or a permit to operate. Depending on the type of business, it is common to need several licenses and permits to operate.
In addition, some states require all businesses to have a license, regardless of size or industry. Some cities and counties also require a general business license. You can research license requirements on your state government website and by contacting your city and county administrative offices.
Finally, if you sell goods that are subject to sales tax, you’ll probably need a seller’s permit. This permit is issued by the state and allows you to collect sales tax, which you’ll then remit to the state.
Step 6. Get Business Insurance
Although becoming a sole proprietor has its benefits, there are some disadvantages as well. Unfortunately as a sole proprietor, business liabilities are also personal liabilities. It may be wise to carry small business insurance.
Without coverage, you’re responsible for any out-of-pocket expenses. General liability can help cover costs for property damage, bodily injury and lawsuits. This can help alleviate financial responsibility for any unplanned incidents or accidents.
Step 7. Open a Business Bank Account
It’s not a requirement that you open a business banking account if you are a sole proprietor, but it can be highly beneficial. Having a business bank account helps keep your business finances organized. Identifying business expenses and filing taxes will be much simpler if you keep your business accounts separate from your personal ones.
A business account also allows you to accept credit card payments and establish business credit. In addition, you may eventually want to grow your business―having a business bank account can be an important factor if you want to take out a loan or set up a line of credit.
Bottom Line
Overall, becoming a sole proprietor is a simple process. It doesn’t require much footwork to get started, and it may take you in a direction you’ve always dreamed of. Working as a sole proprietor can also be a very rewarding experience but it’s important to remember that, although you receive all the profits, you are still responsible for any losses, debts and liabilities as the owner of the business. This can be concerning to some but obtaining business insurance helps to reduce the risks.
Frequently Asked Questions (FAQs)
Can I change my DBA name?
To change your DBA name you would typically file for a “termination or abandonment” of DBA for the old name first. From there, you will have to file for a new DBA with the new business name. Check with your state or locality for the procedure to follow in your area.
How do I pay my taxes as a sole proprietor?
When you’re an employee, your employer withholds taxes from your paycheck. But as a sole proprietor, you must pay income, Medicare and Social Security taxes directly to the IRS yourself. You are expected to make an estimated tax payment each quarter. You can do this online or you can mail a check and paper voucher. There are penalties for failing to make quarterly tax payments.
How do I file my taxes as a sole proprietor?
As a sole proprietor, you will report your business income and expenses on Schedule C of your personal tax return.
Can you convert an LLC to a sole proprietorship?
You can, but it requires you to dissolve the LLC first, which is known as a dissolution. The steps involved include getting approval from all members of your LLC and filing your dissolution documents with the state agency that you filed your articles of incorporation with, which was likely the secretary of state. Then, you have to alert all of your creditors that you are dissolving the LLC so that you can receive your final bills from them and pay them. You must also file all tax forms with the federal government as well as on the state and local levels if necessary. The final steps include transferring any assets that you have to the sole proprietorship, publishing your dissolution, such as in your local newspaper or a posting on your social media sites, and transferring all business licenses from your LLC to your sole proprietorship.
