What Do You Need to File as a Sole Proprietor?

By Jeff Franco J.D./M.A./M.B.A.

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.

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.

Get a free, confidential bankruptcy evaluation. Learn More

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.

Get a free, confidential bankruptcy evaluation. Learn More
How to Create a Sole Proprietorship in South Carolina


Related articles

Do I Need an LLC or a Business License?

One of the first decisions you must make when you decide to go into business is the choice of a legal structure for your enterprise. Many small business owners opt for a limited liability company, or LLC. Other would-be entrepreneurs discover that they must obtain a business license from a municipality, state or the federal government. Depending on your location and the nature of your business, you may decide to form an LLC in addition to obtaining a business license.

What Steps Are Involved in Forming a C Corporation?

C corporations are complex business entities that have chosen to incorporate under Subchapter C of Chapter 1 of the Internal Revenue Code. A C corporation is recognized as a distinct legal entity, and it is owned by its shareholders. The corporate structure protects individual shareholders from personal liability arising out of the business. A C corporation is governed by the laws of the state in which it filed articles of incorporation.

Difference in Business License & Registering a Business

Starting a business can be complicated. In addition to hiring employees, finding a location and establishing clientele, new business owners must also ensure they properly register with government authorities and obtain all necessary government licenses. Without the proper registration and licensing, a business can face fines and penalties. Registration and licensing requirements vary between states and localities.

Related articles

Sole Proprietorship in Kansas

When you’re the sole owner of a business in Kansas and don’t create a legal entity for it, state law designates it as a ...

Forms and Fees for Registering a Sole Proprietorship in Mississippi

Starting a sole proprietorship in Mississippi is an easy way to get your business operations underway since it isn’t ...

How to Get a Sole Proprietorship

For an independent entrepreneur, a sole proprietorship is a common business structure because it is relatively simple ...

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 ...

Browse by category
Ready to Begin? GET STARTED