How to Open a Sole Proprietorship

By Cindy Hill

More than 22 million people run sole proprietorships in the United States, making it the most popular form of American business. One reason for this popularity is that sole proprietorships are the simplest type of business to form and start operating. Formal business requirements for a sole proprietorship are minimal, and a sole proprietor has the option of transforming her business into a partnership, LLC or corporation later on.

More than 22 million people run sole proprietorships in the United States, making it the most popular form of American business. One reason for this popularity is that sole proprietorships are the simplest type of business to form and start operating. Formal business requirements for a sole proprietorship are minimal, and a sole proprietor has the option of transforming her business into a partnership, LLC or corporation later on.

Formation

Most states do not require a sole proprietorship to register with the state business registrar to operate. All a business owner has to do is start running the business, as long as it is operated under the owner's name and not operating in a regulated industry. Writing a business plan for your sole proprietorship will help you keep a firm focus on goals through the startup period, and will help when you are seeking credit or financing for your business, but it is not a legal requirement. Maintaining separate ledgers that document your sole proprietorship business income and expenses will help significantly at tax time, but these are also not a legal requirement of forming a sole proprietorship.

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DBA Name

If you want to operate your sole proprietorship under a name other than your own legal name, most states require that you first register the name as a DBA -- "doing business as" name -- with the appropriate state or local regulatory agency before opening for business. A fictitious name associated with the product or services you sell will help you brand and market your sole proprietorship, even if your personal name remains part of the DBA. For example, Mary Smith Custom Sewing better conveys the nature of your business than just using the name Mary Smith.

Licensing

A sole proprietor operating a business in a regulated industry is typically required to obtain professional or occupational licenses from the state before opening for business. Professionals like lawyers and architects, as well as individuals working in regulated fields like cosmetology, tattoo artistry or mortuary services, need professional licenses from their relevant state agencies. Other types of businesses may require transportation or hazardous waste permits. Construction of a new store or office, or conversion of part of your home into a business, may require local zoning or building permits. These regulations may also put restrictions on parking, lighting and signs for your sole proprietorship.

Tax Registration

If you are going to hire employees to work for your sole proprietorship, you will need to obtain an employer identification number from the Internal Revenue Service. You will also likely need to register with your state tax agency before hiring employees or selling products for which you must collect sales tax. You will need to pay self-employment taxes on any profit your sole proprietorship generates. To do so, report your income and expenses as a sole proprietor on Schedule C, Profit and Loss From Business, of your personal Form 1040 federal income tax return and its equivalent at the state level.

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References

Related articles

Do You Need a Sole Proprietorship Before Registering a DBA?

Operating a business as a sole proprietorship has very few formal requirements. Typically, all an entrepreneur has to do is start running the business under his own name to effectively be in business as a sole proprietor. However, some types of businesses in regulated industries, such as law, medicine and cosmetology, require a state occupational or professional business license before they can begin operations. Regardless of their legal structure, businesses often choose to use fictitious trade names for marketing purposes.

Rules and Regulations for a Sole Proprietorship

Starting your new business as a sole proprietorship is the easiest and least expensive legal business structure you can use, as opposed to forming a corporation or limited liability company. As a sole proprietor, you are the sole owner of your business and generally have the flexibility to operate your business as you see fit, subject to the rules and regulations that apply to similar businesses in your state and local area.

Reasons for Establishing a DBA

Not everyone who starts a business chooses to incorporate or set up a limited liability company, or LLC. Certain business owners can be sued personally for their acts, and the limited liability of LLCs and corporations doesn't help all entrepreneurs. In businesses where the owner expects to be doing all the work, such as sole proprietorships where there are no partners, co-owners or employees, an assumed name, or DBA, for "doing business as") may be appropriate.

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