A sole proprietorship is one method of organizing and operating a business. A sole proprietorship operates as an alter ego of the owner, not as an independent legal entity, giving the sole proprietor complete control of the business. Depending on your state, you may or may not need to file a form to create a sole proprietorship. However, you should contact the Secretary of State's office to determine the proper procedure. For example, the state of Indiana requires all sole proprietors to register with the Indiana Department of Revenue by submitting a Business Tax Application if the business sells products or food.
Advantages and Disadvantages
Sole proprietorships are easy and fast to form, making startup easy if you have little experience with business formation. However, the owner of the sole proprietorship is personally liable for any legal action taken against the business -- for example, if an accident occurs at the business or if a product created by the business is defective. This means that any judgment entered against the business can be satisfied by using the owner’s personal property.
If you decide to operate your sole proprietorship using a different name than your own, you will need to apply for a "doing business as," or DBA, name. A DBA name is a fictitious business name and must be different from your personal name to avoid any confusion. Depending on your state, you may need to apply for a DBA name at the county level or through your Secretary of State’s office.
A sole proprietor is responsible for paying the business' taxes. The default rule is that a sole proprietorship operates under the owner's Social Security number, and the owner lists all profits from the business as his own income on his personal tax return. Generally, as the owner, you will report business revenue and expenses by completing Schedule C on your 1040. However, if you would like to file a separate tax return for the business, you can apply for an employer identification number from the Internal Revenue Service.
Obtaining an Employer Identification Number (EIN)
To obtain an employer identification number (EIN) for a sole proprietorship, complete Form SS-4 and submit the form to the IRS. If you do not obtain an EIN by the time taxes are due, simply indicate on your Schedule C that you are waiting for an EIN. Due to the time it takes to receive an EIN, you should file form SS-4 as soon as possible. The form can be filed online or through the mail. In addition, the sole proprietorship will need to submit a state tax registration form as soon as the business begins collecting sales tax or hiring employees.
If you operate a sole proprietorship that is in an industry regulated by the state there may be additional licenses, certificates or permits you must obtain before you can operate your business. For example, if you are opening a sole proprietorship as a real estate agent, you may need to qualify for a state license by completing the necessary educational courses and take and pass the state real estate license examination.