They’re easy to set up, but that convenience comes at the expense of certain protections that you’d otherwise get through an LLC or incorporated business entity. So, depending on the specifics of your business, you may find that a sole proprietorship doesn’t give you the full range of protections that you need — and that the disadvantages outweigh the benefits. With a sole proprietorship, you don’t have to concern yourself with some of the other components included in an LLC or corporation, such as company officers or registered agents. As the sole business owner, you have total control over decisions, finances and anything else involved with how your company functions. First, whereas other business structures need to apply for an employer identification number, or EIN, with the IRS, sole proprietors are not required to file for an EIN. It’s important to note, however, that you may have to obtain a business license or permit, depending on the requirements of your state or local government.
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. Proprietors must pay individual taxes on the income periodically, for example, as part of the annual individual tax filing. Tax payments may be more frequent, for example, quarterly, depending on local tax rules.
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Users of the accounting software Bench can be paired with a professional bookkeeper who can handle all their tax filing needs. You can file an LLC directly through the Secretary of State or use a company like LegalZoom or Incfile. If you form an LLC, you will need to file articles of organization and create an operating agreement. The IRS will also assign you a new EIN, which you will use on your tax returns.
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. 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 sole proprietorship of state or county clerk’s office where your business is located. The proprietor must make “good enough” decisions in all business areas. If an owner does not have enough knowledge or skills, their decisions may be flawed. There is a finite amount of time to do things correctly or learn to do everything adequately.
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Of course, you’ll have to pay to register your business name, get your business domain, and get the necessary licenses or permits, but you won’t pay the $1,000 average cost of starting an LLC. Even sole proprietorships need a business license to operate, in most cities. You might also need your business license to open a bank account — but more on that below. While sole proprietorships and LLCs are two of the most common business structures, there are key differences between them. Unlike corporations or LLCs, you don’t have to register with the state.
After filing initial articles of organization, LLCs have to file an annual report in many states. An LLC with multiple members has even more responsibilities, such as drafting an operating agreement, issuing membership units, recording transfers of ownership, and holding member meetings. None of these steps are legally required, but are highly recommended for LLCs to preserve liability protection for members.
They can either stick with the default—pass-through taxation—or elect for the LLC to be taxed as an S-corporation or C-corporation. If taxed as a C-corporation, the LLC will pay a corporate income tax at the federal level (most states and some localities also levy corporate taxes). You might be surprised to learn that there’s nothing specific you necessarily need to do to form a sole proprietorship. In fact, you might be operating a sole proprietorship without even knowing it. Any person selling goods and services without a partner is a sole proprietor by default. Depending on where your business is located, you might need to apply for business licenses or zoning permits to legally operate your sole proprietorship.
For example, if your LLC defaulted on its loans, it’d take a lot longer for creditors to seize your personal assets. For example, if you use your own home as your business base, you won’t have to pay more money on space, utilities, and internet. You might even get a tax refund when you file your personal tax return. Now that you have the tools to create a business plan, let’s go over the definition of a sole proprietor and the types of sole proprietorships one would typically launch. Sole proprietorship is a form of business entity in which one person owns all the assets and assumes all the debts of the business.
Advantages of Sole Proprietorship:
If your business name is different from your personal name, you will need a fictitious name permit (sometimes called “Doing Business As” or “DBA”) from your locality. It can be difficult for individuals to manage all aspects of their business properly. The owner can hire employees, outside help, or get professional advice on parts of the business process.
- Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work.
- According to the SBA, there are various private organizations prepared to fund sole proprietor business operations that do not qualify for traditional financing from banks.
- Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more.
- If the desired name is free, articles of organization must be filed with the state office where the business will be based.
The main downside to consider is the extra liability that you face. By contrast, someone who files an LLC has an extra layer of legal protection. If you decide to operate as a sole proprietor, however, there are many important tax and legal implications worth knowing about.
While you may convert to a different business structure in the future, there may be restrictions based on your location. This could also result in tax consequences and unintended dissolution, among other complications. Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses. An independent artist who sells their work to clients is an example of a sole proprietor. Many freelancers, artists, actors, writers and makers tend to function as sole proprietors.
The start-up fees are also low, in line with many government policies that encourage entrepreneurs to take risks and grow the economy by minimizing the friction of starting new businesses. https://www.bookstime.com/ Nonprofit corporations need to follow organizational rules very similar to a regular C corp. They also need to follow special rules about what they do with any profits they earn.
But as a sole proprietor, you must pay income, Medicare and Social Security taxes directly to the IRS yourself. 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.