Putting a Sole Proprietorship on Paper

By Roberta Codemo

Putting a Sole Proprietorship on Paper

By Roberta Codemo

You may already be operating a sole proprietorship and not know it. If you own a freelance writing business, design websites for clients, or make handcrafted furniture out of your home—to name just a few examples—you are a sole proprietor.

Man sanding a chair

A sole proprietorship is an unincorporated business that is owned and operated by one person with no legal distinction between the owner and the business. The owner receives all the business profits and is responsible for the business's debts and liabilities. A sole proprietorship is one of the easiest types of businesses to set up and run and, unlike a limited liability company (LLC) or a corporation, sole proprietorships don't need to file formal paperwork with the state to operate. In short, once you hang out your shingle, you become a sole proprietorship by default.

There are a few things that you need to do to put your sole proprietorship on paper and to make sure you're in compliance with applicable laws.

Choose a Name

Unless you plan to operate your sole proprietorship under your own name, you must choose a name for your business. This name is often referred to as a trade name, fictitious business name (FBN), or “doing business as" (DBA) name. Before you can register your business, obtain permits or licenses, or even open a business bank account, you need to register the DBA name with the county clerk's office. Some states also require you to register the DBA name with your state's filing office.

First make sure the name you choose is available. A quick internet search can often tell you if the name has already been taken. Dig a little deeper and check the fictitious business names databases at your local county clerk's office and your state's filing office. As a last step, search the registered trademark database at the U.S. Patent and Trademark Office. Don't forget to check with a domain registrar to make sure the domain name you choose for your website hasn't been taken.

Once you're satisfied the name is available, it's a good idea to trademark it so other businesses can't use the same name.

Register Your Business

Most states require sole proprietorships to register with their local or county governmental body to obtain a business license or tax registration certificate. There may also be local regulations, sales tax, business or professional licenses, permits, and zoning requirements that you need to comply with. Because these requirements can vary from state to state, always check with your local or county governmental authority. In Illinois, for example, a sole proprietor can access a comprehensive database that lists every required license and permit by going to the Illinois Business Portal on the State of Illinois website.

It might also be a good idea to apply for a federal employer identification number (EIN) from the Internal Revenue Service, even though this is not required for a sole proprietorship. In some instances, banks require businesses to have an EIN to open a business account. If you plan on hiring employees in the future, you will need to have an EIN to report taxes and your business activities.

Open a Business Bank Account

It's a smart idea to keep your business and personal finances separate to track your business income and expenses and to file your federal and state income taxes. The best way to do this is to open a business bank account. Check with your bank to see what, if any, documentation you need. Your bank may want to see a copy of your Social Security card or EIN, a copy of your DBA certificate, and your business license. At the same time, you might want to get a business credit card for expenses related to your sole proprietorship.

Obtain Business Insurance

Business insurance protects your personal and business assets against the unexpected. Some states may require a sole proprietorship to have specific types of insurance, so always check. There are different types of business insurance, such as general liability insurance, product liability insurance, professional liability insurance, or even home-based business insurance. Your business activities dictate what type of insurance coverage you should have.

A sole proprietor is personally liable for all business debts and obligations, so you might want to take out a general liability insurance policy, which protects you against financial loss should your business default on a debt or lose a lawsuit. If you operate a home-based sole proprietorship, you might want to add home-based business insurance coverage to your homeowner's insurance. You might even want to notify your auto insurance carrier if you use your personal vehicle for business.

Having these sorts of documents and accounts can help make sure your sole proprietorship operates in compliance with applicable laws.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.