Conducting Business as a Sole Proprietorship
Because the sole proprietorship is not a separate legal entity, the owner typically signs checks, contracts and lease agreements in his or her own name. Likewise, payments made to a sole proprietorship are often made out to the owner’s legal name.
Although sole proprietorships are usually one-person businesses, they can hire employees if the owner obtains an Employer Identification Number (EIN).
If you operate a sole proprietorship and wish to conduct business under an assumed name, you can register a “doing business as” name (DBA) for your company. With a DBA, you can even open a business bank account and receive payments under your fictitious name.
Advantages & Disadvantages of Sole Proprietorships
The greatest advantage of a sole proprietorship is how simple it is to start. In fact, as soon as you start providing goods or services to your customers, you are considered a sole proprietorship. There is no formal application process, and no registration required.
However, there are also some major disadvantages to sole proprietorships compared to other business types, primarily that sole proprietorships do not provide any asset protection to owners. If you incur business debt, or face legal claims, as the owner you are solely responsible for these issues. There is no legal difference between your business and personal assets, so if your business loses money, you’re personally responsible for paying back your creditors.
If you want to avoid this issue, you can form a limited liability company (LLC). An LLC offers many of the same advantages of a sole proprietorship, while also providing asset protection. In other words, LLC owners are not liable for the company’s business debts.
Recommended: Protect your personal assets by forming an LLC for your small business.
How Are Sole Proprietorships Taxed?
Because a sole proprietorship is not a legally distinct business entity, your business income as an owner is included on your personal tax return. Remember that as a sole proprietor, you’re technically self-employed, so you’ll need to pay both income tax and self-employment tax each year.
Examples of Sole Proprietorships
Any business that could be operated by one person could make a good sole proprietorship. For example, artists, counselors, freelancers, independent contractors, tutors, and musicians are all professions that may be run as a sole proprietorship. Take a look at a few business ideas that work well as a sole proprietorship: