Starting a Sole Proprietorship FAQ
Although there are many ways to structure your business, starting a sole proprietorship is probably the easiest and cheapest. For very simple operations involving just one individual, sole proprietorships tend to make the most sense, but every business is different. Other business structures include partnerships, corporations, limited liability companies (LLCs), and nonprofit corporations. Sole proprietorships may transition to different business structures as their needs change, such as expansion or the hiring of employees.
It is important to understand the benefits and drawbacks of starting a sole proprietorship before you start one. Below are answers to some of the most frequrently asked questions regarding sole proprietorships.
What is a sole proprietorship?
A sole proprietorship is a company with only one owner and is not registered with the state, unlike a limited liability company (LLC) or corporation. Starting a sole proprietorship requires no paperwork -- all you do to create a sole proprietorship is simply go into business. Although you do not have to file paperwork to set up a sole proprietorship, you do still have to acquire business licenses and permits, just like with any other form of business. Most people use the term "DBA" which stands for "doing business as" to indicate a sole proprietorship.
How does a sole proprietorship differ from other company forms?
A sole proprietorship differs from other forms of business in several ways. The chief ways a sole proprietorship is different include:
- Sole proprietorships are the least complex and cheapest form of doing business
- Sole proprietorships require no formal paperwork to set up and don't need to be registered with the state
- Sole proprietorships do not shield individuals from liability for their business debts (see below)
- Sole proprietorships are treated as simple income for tax purposes, and do not need to have separate taxes prepared (see below)
How are sole proprietorships treated for tax purposes?
Unlike corporations, sole proprietorships are not treated separately by the IRS. This means that any profit derived from your sole proprietorship is treated as your personal income and is accounted for on your individual tax return. Any such income is taxed to you in the year it was received.
Am I personally liable for my business under a sole proprietorship?
Yes. Unlike other forms of incorporation, you are personally liable for any of your sole proprietorship's debts or legal judgments against your business. This means that in order to satisfy debts owed by your business, debt collectors can come after your personal assets -- homes, cars, etc. For this reason alone, you should be extremely cautious about setting up a sole proprietorship.
Do I need an attorney to help me start a sole proprietorship?
Not necessarily. But every business is unique and there may be circumstances where a partnership, LLC, or some other kind of business structure is a better fit. You also may want to get more insight into the specific liabilities your sole proprietorship may face. Learn more by contacting a business organizations lawyer licensed to practice in your state.
See FindLaw's Sole Proprietorships section for more articles and resources.