Sole Proprietorship

What Is a Sole Proprietorship?

A Sole Proprietorship is the simplest structure for operating a business owned by one person (or a married couple). By default, states will consider a single-owner business to be a Sole Proprietorship unless the owner (the sole proprietor) files business registration paperwork to form another entity like a Limited Liability Company (LLC) or a C Corporation.

Key elements of a Sole Proprietorship:

• Unlike a Limited Liability Company or C Corporation, a Sole Proprietorship is not a formal business entity.
• Sole Proprietors do not have to file business registration paperwork with the state.
• As soon as the owner begins to conduct business with the intent to make a profit, the Sole Proprietorship is established.
• Sole proprietors may have to obtain certain types of business or professional licenses and permits to operate legally in their industry or location.
• Sole Proprietors are not considered employees of their companies.
• Sole Proprietors are paid by withdrawing funds (taking owner’s draws) out of their businesses for personal use.
• It’s common for entrepreneurs to start as Sole Proprietorships and then register their companies as formal business entities when they begin to grow or expand their businesses.

Many freelancers, consultants, and other professional service providers work as Sole Proprietorships. This business structure is also attractive to entrepreneurs in other industries, too (retail, landscaping, cleaning, and more).

Legal ramifications for owning a Sole Proprietorship:

• A Sole Proprietorship is considered the same legal and tax-paying entity as its owner.
• The owner is personally liable for the legal and financial debts of the business.
• If the business owner doesn’t pay their bills or gets sued by a customer or vendor, the owner’s personal assets (home, car, checking and savings accounts, etc.) might be seized to settle those debts.

Tax ramifications of owning a Sole Proprietorship:

• Sole Proprietorships are pass-through entities for income tax purposes.
• Business profits and losses flow through to the owner’s personal tax returns.
• All of its profits are subject to self-employment taxes (Medicare and Social Security) because the owner doesn’t receive a paycheck from which those taxes are deducted.
• Generally, they must make quarterly estimated tax payments to the IRS, state, and local tax authorities throughout the year.

DBAs and Fictitious Names

When sole proprietors do not want to include their first and last name in their business name, they must request to use a tradename by filing a DBA (Doing Business As). Some states call it a fictitious name filing. Depending on the business’s location, the fictitious name must be filed with the state or the county clerk.

For example, if Lena Caswell wants to market her new business by the name “Immaculate Image Consulting Services,” she would need to file a DBA to get permission to use that name with the state or county clerk’s office. Some states also require businesses to publish a notice about their fictitious name in one or more approved newspapers or other publications in the county where it was filed. In some states and counties, DBAs must be renewed periodically.

Filing a fictitious name does not provide any legal protection for the company name. Its purpose is to protect customers, vendors, and others from unknowingly doing business with shady owners trying to hide their real identities. It puts the owner’s identity on record as the person operating the company under the assumed name. To obtain exclusive rights to use a fictitious name, a sole proprietor must register it as a trademark through the USPTO (U.S. Patent and Trademark Office).

Ongoing Business Compliance Responsibilities

Running a business as a Sole Proprietorship comes with minimal ongoing compliance tasks compared to other business structures. Several responsibilities a sole proprietor may need to stay on top of include:

• Reporting and paying income and self-employment taxes
• Withholding and paying payroll taxes (if the business hires employees)
• Renewing required licenses and permits (including sales tax permits, if applicable)
• Renewing fictitious names

States and local authorities may have additional requirements.

Additional Resources and Articles

• What You Need to Know About Sole Proprietorships
• Sole Proprietorship vs. Partnership
• Sole Proprietorship vs. LLC
• How to Change from a Sole Proprietor to an LLC
• How Do You Pay Yourself as a Sole Proprietor?
• How to Formally Close Your Sole Proprietorship or Partnership