Do you provide goods and services to people? Do you know that you are technically a sole proprietorship if you do? You might want to know whether you need to take further steps in order to formally become a sole proprietor. Here we will discuss the ease with which sole proprietorships are formed, and how there is no need to register as such with the state.
Many people render goods and services to others in their daily lives. However, they may not always see themselves as businesspeople. For example, a freelance writer may be considered a sole proprietor and yet they would never identify as such. This highlights how the sole proprietorship truly is the simplest business form in the US.
How do I become a sole proprietor?
Becoming a sole proprietorship requires no formal action and so long as you remain the single owner of a business, the position applies to you automatically because of your business undertakings. Many people may be sole proprietors already without their knowing it: examples of these are a freelance writer, a consultant, and any home-based business. This is what makes the sole proprietorship so distinctive – it is the only business form that isn’t obligated to register with the state.
However, it is necessary to procure requisite licenses and permits. These vary by the relevant industry, state, and location. For more detailed information on how to obtain necessary licenses and permits, look to the U.S. Small Business Administration and their links to the relevant official documents. Generally you would need to file for a business license. This you do with your city or county. Furthermore, should you wish to run your business from home, you may need to get authority to do so from your locality.
You have to remember that should you decide to operate your business under a name different to your own, you do have the responsibility to file a fictitious name, otherwise known as an assumed name, trade name, or DBA (doing business as). This name has to be unique and cannot already have been assumed by someone else.
Primary Characteristics of the Sole proprietorships:
One of the most important features of the sole proprietorship is that there is no legal difference between the owner and the business. The owner has access to 100% of the profits, but is also 100% responsible for any losses or debts. The onus falls on the owner to sign checks, contracts, and any legal agreement in their own name. Generally, payments are also made out to the owner’s personal name. The lack of separation between the owner and the business has the consequence that taxes are fairly simple to deal with. The business income is represented in the owner’s personal tax return. As even more of a bonus, the tax rates are some of the lowest compared to other business entities.
As the sole owner, the running of the business falls completely on your shoulders. You have ultimate control over the structure that your business will take and how it will operate. You do not have to confer with other relevant stakeholders should you wish to change operations or dissolve the business. In fact, the dissolution of a sole proprietorship is as simple as to halt the rendering of goods and services. You do not have to register the dissolution of the company, and provide any explanations for why the business no longer operates.
When would I need to register my sole proprietorship with federal or state authorities?
There are two reasons why you might need to register your sole proprietorship with federal or state entities and these include if your business plans to sell taxable products or services, in which case you are required to register with the taxing authority. Secondly, the moment that you decide to hire employees, then you have the responsibility to apply for an Employer Identification Number (EIN).
TRUiC provides excellent additional information on the characteristics of sole proprietorships, their benefits, and how they are formed.