When you start a business, there are many types of entities to choose from. Being a sole proprietor is a cost-effective way to get started with your business, especially if you don't plan on having many employees or a complicated business structure. Make sure you weigh the options between being a sole proprietor versus one of the other business entity registrations, such as a corporation or limited liability company. If you decide to go with the sole proprietorship registration, start at the county clerk's office.
Sole Proprietor Definition
A sole proprietor is a business in which one person owns and operates the company under his own tax identification number. This means the company is not a corporation or a limited liability company (LLC) registered with the secretary of state. These are entities on their own once registered, which gives owners protection against lawsuits and other financial liability.
The sole proprietor isn't given these liability protections, which is why this choice is common among new businesses and owners who don't have a lot of personal assets. The sole proprietor is often referred to as a "doing business as," or DBA, entity because the person is doing business under the company name – for example, John Jones DBA Top Flight Instructor Lessons. This allows John to market himself as Top Flight Instructor Lessons.
Business owners like the sole proprietor entity because it is easy to establish and has simplified tax filing requirements. You file your taxes on your personal tax return, using a Schedule C to note the business income and expenses. Keep track of business revenues and expenses on a separate ledger to make filing taxes easier.
Read More: Can an LLC Be an Individual or Sole Proprietor?
Sole Proprietorship Registration
Sole proprietorship registration is done at the county level at the county clerk's office, unlike the corporation and LLC registration that happens with the secretary of state. The process requires filling out a form with your personal information, including your name, date of birth, home address and proposed business address. The proposed name of the DBA is required, as well as the industry products or services you offer.
Once it's completed, you pay a registration fee to the country clerk. This is nominal in most counties. For example, San Francisco's fee is $13 for a DBA registration. Once the form is filed and the fee is paid, you make the mandatory public disclosure, which requires filing a notice in a local news publication stating your registration. This allows any existing businesses the opportunity to contest your business name if it competes with their existing business. For example, you can't use the name Joe's Plumbing if there is already a Joe's Plumbing or perhaps a Joe the Plumber doing business in the area. If no one contests the filing, the county clerk will mail you approval of the DBA and you may proceed with business activities in the name of the company.
Getting a Tax Identification Number
The sole proprietorship uses your Social Security number for tax filing purposes. When you apply for the sole proprietorship, you might want to consider how you can protect your personal data. Many business experts recommend requesting a free employer identification number (EIN) from the IRS associated with the company name. This helps keep business and personal assets separated when you open bank and credit accounts. It is also helpful when hiring employees and filing payroll and unemployment paperwork.
Having the EIN keeps your personal Social Security number private and reduces potential identify theft. Get the EIN before you open bank accounts, credit cards or apply for business loans in the company name. It is easier to establish the accounts with the EIN rather than change them later. It is free to obtain it over the phone with the IRS, and it's immediately provided.
Kimberlee Leonard had a successful career in financial services, insurance and tax preparation before becoming a full-time writer. She has worked with major institutions such as Wells Fargo, First Hawaiian Bank and State Farm.