Find step by step process to become a sole proprietor in each state.
How to Start Your Sole Proprietorship
There’s nothing wrong with being an employee. You do the work and get paid. It’s a simple system that works for millions of people.
But there’s something special about starting your own business. You’re the boss, and no one’s telling you what to do (most of the time). You get to make the decisions that matter.
Sure, there’s some financial risk involved. But the payout can be so much higher than what you might earn as an employee. Bill Gates couldn’t have become the richest person in the world if he had elected to work as a computer programmer for some other company.
Running your own company doesn’t even have to be all that complicated. that’s certainly true, especially when you start a sole proprietorship.
The Sole Proprietorship
This is the kind of business where you’re the boss and you’re answerable to no one else. Only you get to make the decisions regarding what products or services to sell. You put in your money, time, efforts, and skills, and you earn what the customers pay. You’re basically a freelance service or products provider.
Unlike other types of business structure, you don’t even have to register the business with the state. Once you start operating, your business is regarded as a sole proprietorship by default. That means you don’t have to fulfill the requirements set for other types of businesses like a corporation.
There’s no need for a registered agent with a physical address and constant presence in that location to receive legal documents and state correspondence. There’s no need to submit annual reports to the state.
Since you’re the sole owner and decision maker, you don’t have to deal with fussy details like a board of directors and bylaws. After all, it’s not even a partnership, where you have to have rules so you don’t end up with disagreements with the partner. There’s no potential conflict with other business owners.
Taxes are also simple, because everything your business earns is considered as part of your personal income. You don’t have to go through what’s known as double taxation, when your business earnings are taxed first, and then they’re taxed again when they’re part of your personal income. This is one of the main disadvantages when you start a corporation instead.
Yet you also enjoy tax deductions on your business income. According to the Tax Cuts and Jobs Act of 2017, that’s a 20% deduction on your business income. Of course, you’re also allowed to deduct various business expenses.
So, what’s the catch? The main drawback to this type of business structure is that there’s no distinction between your business assets and your personal assets. That’s the main risk, and it’s a huge deal.
You’ll also have to remain as the sole owner. Once you get other investors or part owners to your business, you’ll have to change your business structure.
With this type of business, you’ll have a more difficult time getting funding. After all, you can sell shares of your business to potential investors or highly valued employees. Some banks don’t lend money to sole proprietorships at all, as they regard sole proprietorships as less stable.
While corporations can operate forever, the sole proprietorship is also more limited. The business generally ends when you leave the business for whatever reason, or if you die. If you try selling the business, you’ll find very few (if any) buyers at all.
Why should they buy your business when they can just start their own proprietorship? After all, it’s not as if you can transfer your clients and customers to them. These customers and clients who may be loyal to the business are actually loyal to you. Don’t forget: you’re the business.
If you’re starting a business as a sole proprietorship, here are the steps you should take:
Step 1: Comprehensive Risk Assessment
When you’re running a sole proprietorship, you have to be aware of the risks. And it’s not just about losing your investment because you don’t have customers paying for your products and services.
You have additional risks to factor in. These include mistakes that may result in lawsuits. Maybe your products end up hurting people unnecessarily. That means you may have to pay for their medical bills.
Or perhaps maybe you make a mistake that costs your clients a fortune. They may sue you to recoup your losses, since it’s your mistake that cost them the money in the first place.
You need to think about worst case scenarios and Murphy’s Law, which basically states that if something can go wrong, it will.
This is because you’re not just putting your investment at risk. You’re actually risking all your money in the bank, along with your house, cars, and all your possessions. That’s because with the sole proprietorship, your personal assets aren’t really all that protected.
If there’s a good chance that your products and services may end up in lawsuits, you may want to consider turning the sole proprietorship into a limited liability company (LLC). An LLC is designed to deal with this particular problem, because it’s meant to separate your business funds from your personal assets. With the LLC (or corporation), your business becomes a separate identity.
If you persist on going with the sole proprietorship, then at least get some insurance coverage for these potential risks. At least you’re able to transfer the risk (or some of the risk) and get some financial protection. This is why many professionals obtain professional liability insurance, like doctors getting medical malpractice insurance.
Step 2: Obtain the Required Business Licenses and Permits
Many states require certain types of professionals to obtain specific licenses and permits when they offer particular services. This isn’t just for lawyers and doctors, either.
For example, you’ll need a permit from the health department if your business is involved with food preparation, to make sure that your food won’t endanger the health of your customers. The same may apply when you’re running a daycare, or even if you’re offering electrician services. In some states, even hair salon professionals may require licenses or permits.
So, check out the requirements of your particular state regarding permits and licenses, so you can obtain them if you need them. Without needed permits, the state may impose huge fines or even close down your operations.
Step 3: Name Your Business
Technically, this can be very simple. All you have to do is to use your personal name and a descriptor for whatever products and services you offer. So, your business can be John Doe Car Washing or maybe Jane Doe Plumbing Services.
You don’t have to register your business name at all in this case, since you’re just using your personal name. But you can register it, just so that no other corporation or other type of official business company can use the same name as yours.
Registering is required when you use another name for your business, such as a brand name or even a fictitious name. This is the DBA (“doing business as”) name.
That means checking national and state databases to make sure that no other business is using that name. If it’s already in use, then you can use it for your business.
This is a good thing, because once you’ve registered your unique brand name, no other new business can use your brand name either. That means you can establish and protect your brand reputation more easily.
DBAs can be quite convenient, even if it’s not required for your state. Banks usually require it when you open a business bank account that’s separate from your personal bank account. You’ll also need it when you get a business credit card.
Step 4: Obtain an EIN
Since you and the business are generally considered one and the same, you can use your own Social Security number as the Tax ID number for your business. After all, everything you earn from the business is part of your personal income.
But it’s a lot more convenient if you obtain an Employer Identification Number (EIN) for your business. This functions as the Social Security number for your business, making your business more distinct. You will absolutely need this if you start hiring employees for your sole proprietorship, or if you start up a retirement plan.
Also, the EIN may be a requirement as well when you’re opening a separate business bank account.
Start Your Website
Sure, you can always just sell stuff on Amazon.com on a freelance basis. Or you can go with Facebook and sell stuff there.
But if you’re actually serious about growing your business and establishing your brand, then a business website is a must-have. Lots of people doubt the authenticity of any business that doesn’t have a website.
- With a website, you introduce yourself. You should probably show your picture, and describe whatever products and services you’re offering.
- You offer contact information.
- It’s basically unlimited advertising.
- It can function as a platform for selling stuff.
Just make sure you have a professional-looking website. An amateurish website may have potential customers thinking that you’re not all that good at your job.
One of the reasons why the US is considered one of the great countries in the world is that here, it’s easy to start your own business. It’s heaven for capitalists. And a sole proprietorship is the easiest type of business to start. Heck, you don’t really have to do anything official to have a sole proprietorship.
Just make sure that it’s the right type of business for you. It may be right for your business at first, but as your company grows, then you might want to think about switching to an LLC or a corporation.