Starting Sole Proprietorships

April 13, 2006

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The easiest and least expensive way to begin operating a business is as a sole proprietorship. You simply decide to begin operating the business as a sole proprietor and it's done.

There are no documents or forms needed, unless the business will operate under a name other than the owner's name. (You may also have to file forms if you need a business license, but that's a separate issue). If the business will operate under a name that is different from the owner's name, most localities will require you to file a fictitious owner affidavit. A fictitious owner affidavit informs the local government and the public that the business is operating under an assumed name and indicates who the owner is.

Warning

In some jurisdictions, a business cannot begin to operate unless the proper business license has been obtained by the owner.

To find out more about the requirements in your locality, go to or call the courthouse located in your county seat. Ask for the county clerk. The clerk should be able to answer any questions you have and to give or send you whatever forms you may need.

Work Smart

Choosing between your own name and a fictitious name can be a difficult decision. There are a couple of rules of thumb. If you're reasonably well-known and well-respected in your community or in your business field, use your own name. It can be a great marketing tool.

However, there's a risk with using your own name. If your business fails or gets into financial or legal trouble, it'll have your name on it. If you try to start another business, people may associate your name with the earlier troubles.

Once you file your fictitious owner affidavit with the county clerk, you should, of course, keep a copy of it. You'll need it from time to time, such as when you open up a business bank account under the fictitious name.

If you operate under a fictitious name, make sure that you file an affidavit in each county where you do business. If you do business across state lines, the rules get a little trickier because the rules can vary among the states. In that event, you should discuss your options with your attorney.

Liability. As the owner of a sole proprietorship, you will be personally liable for all obligations of the business. Personal liability allows creditors of the business to go after your personal assets if the business assets are not sufficient to cover the business debts. Likewise, your personal creditors can go after your business assets to satisfy your personal debts.

Since you will be personally liable for obligations of the business, you should consider whether the business will be exposed to any potential lawsuits. For example, the business can be exposed to liability for customers injured on the premises or from products sold by the business. If the possibility of lawsuits exist, you can limit your exposure by purchasing business insurance (general liability, malpractice, or product liability if necessary). Alternatively, you might want to consider a different business form that would provide greater liability protection, such as a corporation or a limited liability company.

Work Smart

If you are not concerned with limiting liability because your type of business is virtually risk-free, a sole proprietorship may be the perfect vehicle in which to operate your business.

Advantages of a sole proprietorship

Control. The owner has complete control over the business.
Simplicity. A sole proprietorship is easy to start and operate.
Inexpensive. Startup organization expenses are minimal since few, if any, legal documents need to be created to begin the enterprise.
No double taxation. The business is not treated as a separate taxable entity. The business income is reported on the owner's individual tax return and is therefore only taxed once.

Disadvantages of a sole proprietorship

Liability. The owner is personally liable for any obligations of the business.
Limited ownership. A sole proprietorship by definition is limited to one person. Thus, if the owner wants to admit another owner, such as a spouse, family member, or friend, the sole proprietorship would have to end. A new business arrangement, such as a partnership, would be created either by default or by intent.

Tax issues. The tax treatment of a sole proprietorship is relatively simple. Business income or loss is reported on the owner's individual income tax return. The owner may be subject to self-employment taxes. If the business will hire employees, a Federal Employer Identification Number will need to be obtained and payroll taxes will have to be paid. The Federal Employer Identification Number can be obtained by filing a Form SS-4, Application for Employer Identification Number.

Among the Business Tools is Form SS-4. It is in Adobe Portable Document Format (.pdf), and you will need the free Acrobat Reader to view and print the file.