Starting your own business is a dream for many people, but it can sometimes seem overwhelming.
Several questions must be answered: Which business structure do I choose? How do I declare income? Do I need a partner?
Numerous aspects might be unclear when you’re just starting out.
With this in mind, there is one avenue that those with an entrepreneurial spirit often choose to take: starting a business by creating a sole proprietorship.
This type of ownership status could be the easiest and fastest way to get up and running, especially if you want to start on a small scale.
In this article, we will introduce you to a sole proprietorship, its benefits, and how to set one up when getting your business off the ground.
What is a sole proprietorship?
Also known as an unincorporated business, it is a simple type of business structure run by an individual owner (sole proprietorship).
This individual is entitled to all profits earned but is also responsible for the entirety of all debts, losses, and liabilities that the business takes on.
To give you an idea, here are some examples of jobs that can be considered sole proprietorships:
- Graphic designer
Why you should consider establishing one
A sole proprietorship offers many advantages for entrepreneurs, especially if you are just starting your business. Here is how it works:
Simple tax management
The income tax return for a sole proprietorship requires filling out a Schedule SE (self-employment tax) and a Schedule C (which shows profits and losses).
Better control and maintenance
For many entrepreneurs, sole proprietorships are also easier to manage, as there are fewer legal fees and requirements than a limited liability company.
Also, as mentioned above, being a sole proprietor means you exercise full control over operations.
Important note: While this business status sounds appealing (and its benefits justify the appeal!), keep in mind that you are fully responsible (personal liability) for the obligations of the company.
Namely, if you are unable to repay the business debts, your creditors can demand payment by way of your personal assets.
How to start a sole proprietorship
Now that you know more about sole proprietorships and how this type of business ownership works, let’s look at the steps necessary to obtain your legal status.
1. Choose your business name
The first step before starting your journey as a sole proprietorship is to choose your business name.
For this purpose, you have two choices.
- The first one, which is the fastest and easiest method, is to take your full legal name as your business name. This option is especially useful for freelancers who are starting their own company.
- The second option is to create a separate business name. With this route, you will be asked to fill out a DBA (doing business as) form that will indicate the name of your new company. This option definitely has its place — some entrepreneurs who have a business idea not only want to have a legal name but also a brand name.
Important note: It’s important to keep in mind that DBA forms vary from state to state.
Consult the local officials (Secretary of State’s offices, Departments of Revenue, etc.) in the county where your business is located for specific information.
2. Apply for an employer identification number
At this stage, it is possible for entrepreneurs to start conducting business directly using their social security number for tax purposes.
However, it is recommended to apply for a federal employer identification number (EIN) for more flexibility.
This number will be very useful for the development of your business, as it allows you to:
- Hire new employees
- Apply for business licenses
- Open business bank accounts and apply for business credit or loans
- File tax returns and withholding statements with the IRS
3. Obtain a business license and permits
Once you have obtained your EIN, you must find out about your industry’s different business licenses.
Depending on the type of business and the type of activity, some states require certain business licenses regardless of the size of your business (think of someone selling delicious food at a pop-up — that person needs a permit from the local health department in order to be legitimate).
It is, therefore, very important to find out what legislation and requirements are in effect in your local government.
Here’s another example: you will probably require a sales license if you sell products that are subject to sales tax.
You are permitted to collect sales tax with this permit, which is issued by the state and requires payment to the state.
4. Get business insurance
Before you start your business, keep in mind that running a business also has risks that must be considered.
As a sole proprietor, the responsibilities of the business are also your personal liabilities.
Therefore, to avoid any risk, it is advisable to take out insurance, especially for small business owners.
To deal with this kind of situation, general liability insurance is the best choice.
It will allow you to meet the different costs associated with lawsuits, claims of bodily injury, etc., by alleviating financial responsibility.
And it will backstop any warranty you offer with your product or service that defines exactly what is and is not covered.
Keep in mind that your liability as a sole proprietor is unlimited.
You can also opt for different types of insurance depending on your type of business:
- Property insurance
- Disability insurance
- Car insurance
- Health insurance
While purchasing insurance may seem like a large expense, it will protect your personal assets in the event of adverse circumstances.
For more information on the types of coverage, you can go to the Small Business Administration website.
5. Open a business bank account
Even though the income from your company is your own hard-earned income, we advise you to separate your business expenses from your personal expenses by opening a business bank account.
Doing so will help streamline all your invoicing and accounting activities. The following reasons apply:
- If you sell in a physical store or online, a business account allows you to accept credit card payments and checks. Invoicing software greatly simplifies this task.
- A business account allows you to easily see the profits and losses of your business, especially during the first year when you will see the different investments (office rent, business trips) that can be deducted from taxes.
Start your business with PandaDoc
Starting your own company is a big step with a lot to tackle, and that includes making document management as efficient as possible.
Keep in mind that you actually don’t have to do it alone! (Even with the “sole” label.)
With 750+ business templates available, we have every use case covered to assist you in your sole proprietorship journey.
If you have a business idea and are ready to initiate a sole proprietorship, use the power of PandaDoc to oversee the development of your new company — contact our representatives and start your PandaDoc trial today!