Sole Proprietorships: Everything You Need to Know

By Kelly Spors
The Hartford Small Biz Ahead | Originally published December 10, 2020
Updated: November 14, 2022

Before you start raising capital, you’ll need to make a key decision as a business owner. You’ll need to figure out which form of business will best serve you and your company. The majority of U.S. businesses—about three-quarters of them—choose a sole proprietorship.

Alternatives to sole proprietorship include incorporating into an S corporation or a C corporation or forming an LLC. These other structures each provide their own unique attributes and benefits and will generally shield your personal assets from the business’s legal liability—something a sole proprietorship won’t do. That said, being a sole proprietor comes with its own advantages to consider.

Given today’s challenging economic climate with COVID-19, it’s important to weigh the pros and cons of all the business structures. Choosing the right business structure can affect your ability to find investors and attract customers. It also impacts how much you spend to run your business, how you pay taxes and how legally protected you are.

Read on to learn more about the ins and outs of being a sole proprietor.

What Is a Sole Proprietorship?

A lot of small businesses may ask, “What is a sole proprietorship?” By definition, a sole proprietorship is a business owned by one person where there’s no legal separation between the business and the owner. That means if the business gets sued, the owner can be held financially liable and may have to pay legal defense costs and settlement money using their personal assets.

At the same time, a sole proprietorship is by far the simplest type of business to start and operate. This is because you don’t have to jump through all the hoops that incorporation entails, such as filing paperwork annually with your state and complying with the procedural rules of incorporation.

Many business owners—especially solo entrepreneurs without employees—choose to remain sole proprietors and not incorporate because of the simplicity. In fact, 86% of all non-employer U.S. businesses were sole proprietors in 2015, according to the U.S. Census Bureau.

What Makes a Sole Proprietorship Unique?

There are several key traits that set sole proprietorships apart from other types of business structures:

• Simplicity: Compared to other types of business structures, sole proprietors are generally required to file very little (if any) paperwork with their state government or adhere to particular protocols.
• Affordability: A sole proprietorship is typically the least expensive type of business to start and operate due to the limited amount of reporting required. By comparison, if you form an LLC or S Corp, you typically must pay a state filing fee that can range anywhere from $50 to $500 and may owe annual or ongoing state fees.
• Naming protocols: As a sole proprietor, you have the flexibility to operate under your personal legal name and don’t need to register your name unless you create a fictitious business name.
• Profit structure: Any profit goes directly to the business owner rather than the business itself. Likewise, any loss must be claimed on the business owner’s personal tax return.

How to Form a Sole Proprietorship?

Starting a sole proprietorship is incredibly easy. Whenever you start a business by yourself, you’re automatically a sole proprietor by default unless you actively choose to incorporate or form an LLC. That said, here are the basic steps of starting any business, including a sole proprietorship:

Create a business name. For tax filing purposes, you’ll need to decide on a business name. This could simply be your full personal name (“Terry Smith”), or it can be a fictitious business name (“Smith Consulting” or “Pinnacle”).

Keep in mind that if you choose to create your own business name, your state probably requires it to be distinguishable from other registered businesses. That’s a smart idea anyway due to common and federal trademark protection rules.

Obtain any required business licenses or permits. Depending on the type of business you’re starting, your local or state government may require you obtain particular types of licenses or permits in order to legally operate. Check out your state’s business licensing website.

Open a business bank account. Sole proprietors who operate under their own name—rather than “doing business as” under a fictitious name—can generally keep their business income in their personal bank accounts. But keeping them separate is often beneficial, as it allows you to keep better tabs on your company’s finances by not intermingling them with your personal finances.

Moreover, if you plan to seek outside financing for your business, you’ll want to be able to show that you’re managing your business diligently and not mixing it with your personal assets too much…[MORE]

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To read the entire article by Kelly Spors at The Hartford Small Biz Ahead website , visit: Sole Proprietorships: Everything You Need to Know