Every state has its own code of business laws authorizing the formation and management of business entities. All states allow individuals to conduct business activities as a sole proprietor without forming an independent legal entity. The simplicity of forming a sole proprietorship is one of its chief attractions to many entrepreneurs. Some states require a sole proprietorship to obtain a statewide business license. In other states, business licensing is conducted by municipal agencies. Local licensing requirements may vary depending on the nature of the sole proprietorship business and its location.
Sole proprietorships in all states may operate under an assumed or fictitious business name, referred to as a "doing business as," or DBA, name. In some states, this name must be registered with a state or local agency, but no registration is necessary in other states. A primary purpose of registering a DBA is to notify the public of the contact information for the individual who is responsible for the business activity. Registering a DBA does not create a separate business entity. Sole proprietors usually continue to hold bank accounts and sign checks and contracts in their own name, even if they operate their business under a DBA.
The income from a sole proprietorship business is taxed as personal income to its owner. The sole proprietor does not need to file separate income tax returns for the business, but rather reports her income and business expenses on Schedule C, the business profit and loss attachment to her Form 1040 personal income tax return. If your sole proprietorship will have employees, you will need to obtain a federal Employer Identification Number and may need to file employer tax returns, including reports on income tax, Social Security and Medicare withholding, and unemployment tax.
Debts and Liabilities
When you operate as a sole proprietor, you are personally liable for the business's debts. If those business debts become overwhelming, sole proprietorships cannot file for business bankruptcy under federal law because the business is not an independent entity. Owners who want to discharge business debt must file personal bankruptcy. The potential for unlimited personal liability for losses incurred or judgments rendered against the sole proprietorship are among the disadvantages of operating a sole proprietorship.