What Do You Need to File as a Sole Proprietor?

by Jeff Franco J.D./M.A./M.B.A.
Operating as a sole proprietor minimizes state filings.

Operating as a sole proprietor minimizes state filings.

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For entrepreneurs who want to operate a business without a legal entity, they can do so and operate as a sole proprietor. An advantage to operating as a sole proprietor is that you can start your business operations immediately rather than having to go through the process and expense of creating a corporation or a limited liability company. However, sole proprietors are personally liable for all debts and obligations of their business, unlike business entities.

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No State Registration

Since you aren’t creating a separate legal entity, it isn’t necessary to notify your state of your intention to operate a legal business. In contrast, businesses that want to operate as a corporation or LLC must file formation documents with the relevant state agency – usually the secretary of state. Moreover, some states, such as Delaware, also require corporations and LLCs to file annual reports accompanied by the payment of a franchise tax. Therefore, operating as a sole proprietor can save you a significant amount of money in fees and taxes as well as time dealing with government regulations.

Doing Business As

State laws require sole proprietors to use their legal names for any business they operate, unless they have filed a fictitious business name registration, or a Doing Business As with the respective state or local government. The rules can be a little different, depending on the state you operate in, but generally, the DBA you choose must be unique -- meaning no other business in the jurisdiction has already registered the name as a DBA or a legal business entity. To illustrate, suppose John Smith is a sole proprietor. He can refer to his business as John Smith, without having to register with any government agency. However, if John Smith names his business JS Enterprises, or John Smith Enterprises, he needs to file the appropriate DBA registration forms first.

Tax Responsibilities

When you operate as a sole proprietor without employees, it isn’t necessary to apply for an employer identification number with the IRS, but you do have that option. You only need an EIN if you have one or more employees, if you have a Keogh plan, or if you have to file excise tax forms for alcohol, tobacco or firearms, for example. If you choose not to use an EIN, you can use your Social Security number whenever a taxpayer identification number is requested, including on your federal income tax returns. You must pay tax on your net business earnings, but unlike a corporation, you include them on your personal income tax return. Sole proprietor earnings are calculated on a Schedule C, but ultimately end up on your 1040, with all other non-business income.

State Taxes and Licenses

Depending on the tax laws of your state, you may need to report your sole proprietor earnings on your personal state income tax return. If your business requires that you collect sales tax because you sell goods to customers in your state, you might need to register with your state to collect sales tax. Having employees will make you responsible for paying unemployment, Social Security and Medicare taxes, as well. And depending on what your business activities are, you may also need to apply for one or more licenses or permits with state, county and other local governmental agencies. For example, if you want to sell liquor, you won’t be able to operate without a license or permit, regardless of whether you’re a sole proprietor or a business entity. And if you serve food to the public or operate a construction business, there are usually a number of licenses or permits you'll need before you can operate.