Putting a Sole Proprietorship on Paper

By Larissa Bodniowycz, J.D.

Putting a Sole Proprietorship on Paper

By Larissa Bodniowycz, J.D.

A sole proprietorship is a business owned by one person who has not organized their company as a formal, separate entity such as a limited liability company (LLC) or corporation. The business and the person operating it are legally one and the same.

Businessman looking down at pad of paper

One of the advantages of a sole proprietorship is that there are very few formal requirements. To form one, you simply start operating a business. There are, however, some aspects in which documentation is beneficial or even necessary. You should document all business operations that involve the following topics.

DBA Registration

Although sole proprietorships often operate under their owner's name, doing so is not a legal requirement. They can choose a trade name to use for conducting business. For example, if Mary Jones operates this type of entity, she can operate under her legal name, "Mary Jones" or under a trade name such as "Mary Makes Stuff."

To operate under a trade name, also called a DBA (which stands for "doing business as"), assumed name, or fictitious business name, you must register the name with the government agency that handles small businesses in your jurisdiction. In most areas, registration requires completing a form, paying a fee, and publishing notice of your DBA in local newspapers.

Contracts, Income, and Expenses

A sole proprietorship is still a business and should run like one. Like all businesses, they should formalize agreements into signed, written contracts. This includes contracts with services providers, independent contractors, and vendors.

Even though it is legally indistinguishable from its owner, it's important to track business income and expenses separately for taxes and other purposes. Income from the business passes through to the owner, who reports it on their personal tax returns. However, the owner must still separately report business income and expenses to the Internal Revenue Service (IRS) on a Profit or Loss from Business (Sole Proprietorship) form (Form 1040, Schedule C).

Having a written record of business income and expenses is also required for other purposes, such as applying for a business loan. If a sole proprietor wants to apply for a business loan, they must present potential lenders with documentation of their income and expenses. An oral statement describing the previous year's revenue is not sufficient. Lenders want to see written proof of business earnings. Using separate bank accounts for business operations and personal finances helps make tracking business income and expenses easier.

Licenses, Registrations, and Permits

To operate lawfully, sole proprietorships must also obtain the same licenses, registrations, and permits required for all businesses. These requirements come from the federal, state, and local levels. For example, many cities require businesses to pay for and obtain a business license to operate within city limits.

If you are a sole proprietor, you should consider your options in terms of creating a trade name or DBA to be used for business purposes. You'll want to ensure that your business assets, expenses, and overall professional activities are kept separate from your own personal activities. Formally doing so can protect you in the future.

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.