How to Start a Sole Proprietorship
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Ready to fly solo and start your own business? One of the first decisions you’ll make is determining how to structure it. A common choice for many is the sole proprietorship. But before you take off, here are some important points to consider when you start a sole proprietorship.
What Is a Sole Proprietorship?
Simply stated, a sole proprietorship is a type of business owned and run by one person. The person and the business are one entity. The owner gets all the rewards and takes all the responsibilities. Here are some of them:
- Total control - You make all the decisions. No need to consult with a partner or shareholders. That includes selling or transferring the business if you choose.
- Simple tax treatment – Since you and the business are the same, you’re taxed as one entity. There is no separate corporate tax.
- Easy to set up - No formal action is required. But you may need a business license or permit. The requirements vary by state. Nolo.com offers a free 50-state guide that includes links to forms, government agencies, and other valuable resources for your area.
- Total accountability – You may have total control but you also take on great responsibility. After all, the success or failure of your business rests totally on your shoulders.
- Funding – It may be more difficult to secure investment funding since you’re not offering stock in the company. Banks may be hesitant to loan you money since the only collateral you have is your own.
- Financial exposure – You are on the hook for all debts and obligations. That includes your business and personal assets. It also includes any legal liability resulting from your actions or those of your contractors.
Three More Things to Keep in Mind
Think that a sole proprietorship is right for you? Here are a few more things to consider as you start your business:
- Keep personal and business separate – While the owner and the business are considered one entity, you still want to manage them separately—from budgeting to banks accounts. It will help you track expenses, measure progress, and set goals. It also helps establish to your customers and creditors that you are a professional enterprise.
- Check before you name – If you decide to do business with a name that’s different from your own, be sure to register it. You don’t want to print business cards or secure advertising only to find out someone else owns the name. The Small Business Administration (SBA) offers guidelines on accomplishing this.
- Consider alternatives – There are other ways to structure your business. If you are concerned about taking on all the liability by yourself, a corporate structure might be more appropriate. But then you will lose some control. Consult your legal and accounting resources to learn more about these corporate structures.
A sole proprietor may have advantages for first-time business owners taking off on their own. Over time, some businesses migrate to other corporate structures as their business grows. Learning about sole proprietorships helps you determine if you’re ready to start by flying solo.