One of the first decisions that anyone going into business today needs to make is how to structure their company. Sole proprietorship is a type of business that is owned and operated by an individual (no partners involved) who pays personal income tax on business income. Sierra Campbell is a small business editor for USA Today Blueprint.
Depending on the type of business, it is common to need several licenses and permits to operate. However, many sole proprietors use a trade name for marketing purposes or to keep their personal identities separate from their business. If you plan to use any name other than your personal name, you’ll register a DBA name. For instance, Jane Smith doing business as “The Wedding Seamstress.” You are still operating as a sole proprietor but choosing to run your business under your business name. Make sure that no other business has your name by doing a search within your jurisdiction. When you start a sole proprietorship, your legal name is, by default, your business name, so it simplifies the process.
Sole proprietorship
You’re simply a sole proprietor once you begin doing business – and earning business income. While sole proprietorships and LLCs are two of the most common business structures, there are key differences between them. Many entrepreneurs love sole proprietorships because of the ownership they have over business decisions and revenue. If you are a sole proprietor, creating a Wise Business account can help you save time and money. Sole proprietors do not always need a separate business account, however, it’s good practice. Having a separate account can help you separate your personal and business expenses.
Once you’ve got your business up and running, any profits you generate will go to you directly. However, you’ll also be personally responsible for the debts and financial obligations that come with the company. The benefits of simplicity are accompanied by some drawbacks, including all liabilities being passed through from the business to the individual and funding being harder to come by. However, as the business grows, it may make sense to transition into a different legal structure. If you’re looking to change your sole proprietorship to an LLC, you first need to ensure that the name of the company is available. There is no limit on the number of employees that a sole proprietor can employ; however, as the employer, a sole proprietor is responsible for filing taxes and proper administration for all employees.
Sole Proprietorship 101: The Easy Guide to Setting One Up
You should remember, however, that when you take money out of your business to pay your taxes, it will come out as an owner’s draw and not an expense. Banks consider the sole proprietorship model to be risky, as the owner’s personal assets are usually limited and can sole proprietorship examples near me run out at any time. Financial institutions are usually reluctant to issue credit or give out loans to sole proprietors for fear that they won’t be able to repay them. Most people interested in entrepreneurship have heard the term sole proprietorship many times.
- As a freelance accountant, you would work with small-business owners and audit their inflow and outflow of cash.
- On the other hand, if you already have a very strong business plan, are hiring employees, or are concerned about liability, you might be better off starting your business as an LLC or corporation.
- Gyms aren’t likely to accept the liability of letting you train people in their building unless you are an employee, so that their insurance will cover any mistakes.
- The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions.
- The term sole proprietorship refers to a business owned and operated by one person, which is not registered as a corporation or a limited liability company.
- As a sole proprietor, you are personally responsible for all your business debts and obligations, including loans, leases, credit accounts and lawsuits.