A significant advantage of a sole proprietorship is the lack of bureaucracy and the quickness of making and executing decisions. The sole proprietor is in control of the business decisions and their implementation. His decisions don’t have to be approved by a board of directors or shareholders, so the sole proprietor has the right to decide and implement on his timetable. Unlike an LLC or corporate entity, sole proprietors have no shares or interest in their business to sell to raise capital. A sole proprietorship is ideal if you want to dip your toes into the waters of entrepreneurship. There are no major upfront costs, and you’re only responsible to yourself for the continued operation of the business.

Obtaining a Tax Registration Certificate

It also doesn’t hurt that the sole proprietor is the sole beneficiary of any profits or financial incentive. We break down what a sole proprietorship is, the advantages and disadvantages of structuring your business as one, how to register one, taxes, and more. Many business owners struggled with differences in these entities and were able to decide, and hopefully, after reading this, you will be able to decide whether the sole proprietorship is right for you. A Sole Proprietorship is the simplest structure for operating a business owned by one person (or a married couple). Even if the federal government doesn’t require you to get a business license, your state, county or city may have its own requirements. You will likely be required to get at least one business license or permit between federal, state, county and city requirements.

What is the difference between a sole proprietor, self-employment, or independent contractor?

• Whether you decide that a Sole Proprietorship or another business entity type is right for you, you can count on CorpNet to help you get your company up and running.
• Because there’s only one owner—you—you can keep all income generated by the business.
• As a sole proprietor, you’ll have to take responsibility for withholding and paying all income taxes, something an employer would normally do for you.
• Each type of sole proprietorship has unique characteristics and responsibilities, catering to different preferences and business models.

To avoid using your Social Security number for business purposes, you should obtain an EIN. One of the easiest ways to apply for an EIN is to apply online through the IRS website. You also have the option to apply for an EIN by mail or fax using Form SS-4—and our guide on how to get an EIN will walk you through both bookkeeping and payroll services options.

• The sole proprietorship isn’t a formal legal entity, so there is nothing to apply for or register.
• LegalZoom is not a law firm and does not provide legal advice, except where authorized through its subsidiary law firm LZ Legal Services, LLC.
• On the other hand, if you already have a very strong business plan, are hiring employees, or are concerned about liability, you might be better off starting your business as an LLC or corporation.
• A seller’s permit allows your business to collect sales taxes from customers to cover any sales tax that you’ll owe to the state.

Sole proprietorship taxes

If you’re wondering if a sole proprietorship is the right solution for your business, follow along to learn more about the pros and cons of this business structure. It’s the simplest business structure and most popular option for one-person operations. You can register your business and get a DBA with your secretary of state. When you’re an employee, your employer withholds taxes from your paycheck. But as a sole proprietor, you must pay income, Medicare and Social Security taxes directly to the IRS yourself. It doesn’t require much footwork to get started, and it may take you in a direction you’ve always dreamed of.

Easy tax preparation:

You’ll pay federal and state income tax on your business profits, and you’ll also pay self-employment taxes. Another advantage is that this business structure has a lower tax burden. The Internal Revenue Service (IRS) sees sole proprietorships as pass-through entities, which means the income is passed on to you, the business owner, at the personal level. This also means your business is not subject to double taxation since you only have to pay taxes on your individual income tax return. You can, but it requires you to dissolve the LLC first, which is known as a dissolution.

Not only is she passionate about learning and growing, she believes in embracing a healthy lifestyle. The domain name is a unique URL address used to direct traffic to a specific website. In this case, the domain name will be specific to your business name or catchphrase. Depending on which domain registrar you go with, you will need to do a name search to make sure it’s available. It’s best to keep the domain name as close to your business name as possible.

• This is your greatest digital asset―one where customers can learn about your products or services.
• When the owner of a sole proprietorship dies, the business will be dissolved, and any remaining assets are included in the owner’s estate.
• Check with your state or locality for the procedure to follow in your area.
• Sole proprietorships are not legally required to have a business bank account, unless they have a DBA (Doing Business As) or “fictitious business name”.
• When the company that sold Leo the supplies demands payment, he can’t pay the bill.

How to start a sole proprietorship in 6 steps

There are over 23 million sole proprietorships currently operating in the United States, making it by far the most popular form of business entity. A sole proprietorship is the best option if you’re starting a small business. You can always convert your sole proprietorship to an LLC by refiling your business name and procuring an EIN from the IRS. The EIN or Employer Identification Number is a unique identifying number for a business with the Internal Revenue Service (IRS). A sole proprietor is not required to have an EIN unless they have employees.

If the services you provide don’t require licensing, you can get started immediately. Also, as you start conducting business, remember to maintain records of your income and expenses to Accounting Periods and Methods monitor your business’s financial health. LegalZoom can help you determine what licenses and permits apply to your business. A business account also allows you to accept credit card payments and establish business credit. In addition, you may eventually want to grow your business―having a business bank account can be an important factor if you want to take out a loan or set up a line of credit. Although becoming a sole proprietor has its benefits, there are some disadvantages as well.

If you’re on the fence between the two types of business formation check out the full Sole Proprietorship vs. LLC comparison. Sole proprietorships are the most common way to start a business — and generally also the simplest and most affordable. Keeping track of expenses is important in a sole proprietorship so you can list them as business expenses on your tax return.