Things To Know When Setting Up A Sole Proprietorship

Deciding to set up your own sole proprietorship is as exciting as it is daunting. However, while you may be going into this business venture by yourself, there’s no reason to feel alone. In fact, sole proprietorships are the most common business structure in the US. 

There are over 23 million sole proprietorships in business today, making up roughly 73% of the American economy. So, if you’re worried about starting your own sole proprietorship, don’t be; you’re in good company. 

In this article, we are going to go over all the basics you need to know about starting a sole proprietorship so that you can take that first step on your path to realizing your dreams and running a successful business. Plus, you may even make a few dollars on the way. 

What Is A Sole Proprietorship?

Sole proprietorships are the most common business structure in the US because they are the simplest, to put it plainly. According to the IRS, a sole proprietorship is a business started by an individual. In even simpler terms, it’s a business started by just you and with no partners. 

In the eyes of the IRS, you and your business are one entity. This means that you take on all the responsibilities of your business, as well as any legal repercussions associated with your business (we’ll get to the pros and cons later). However, being the owner of a sole proprietorship also gives you tremendous freedom, as you are the boss and can make executive decisions regarding nearly every aspect of your business. 

While running a sole proprietorship may sound like a large responsibility (and it can be), many people are sole proprietors unintentionally. For instance, if you are a freelance web designer, you are already a sole proprietor; congratulations! Before we get into the nitty-gritty of how to build a sole proprietorship, let’s go over some more examples. 

What Are Examples Of Sole Proprietorships?

Essentially, a sole proprietorship is any business or individual that offers services or products to their customers in exchange for money. These include: 

  • Writers
  • Editors
  • Photographers/Videographers
  • Designers
  • Landscapers 
  • Chefs
  • Accountants 

This, of course, is not a comprehensive list but provides a frame of reference for what sorts of individuals are considered sole proprietorships 

How to Set Up a Sole Proprietorship

Compared to other forms of businesses, sole proprietorships are remarkably easy to get up and running. Unlike a corporation, you do not have to register your company with your state of business. 

However, there are a few steps you will have to take in order to help make your business successful. 

Establishing a Name

When starting a sole proprietorship, The IRS will recognize your legal name as your business name by default. However, in many cases, you will want to create a separate name to help brand and market your business. In order to do this, you have to file something called a DBA, which stands for Doing Business As.

In order to do this, you’ll have to submit a DBA application through your state. A DBA does come with a price, costing anywhere between five and one-hundred dollars, depending on your state. 

When choosing your name, you’ll have to make sure that it doesn’t already belong to someone else. This can be checked by visiting the U.S. Patent and Trademark Office’s website. 

Acquiring an Empolyee Identification Number (EIN)

No matter how big or small it is, every business in the US is required to pay taxes. Because of this, you will need to have an EIN or Employee Identification Number. This can be applied for directly through the IRS website or by filling out and submitting a physical SS-4 form, also found through the IRS’s website. In addition to being required for tax purposes, banks often require EIN numbers to open a business account. 

Opening a Business Account

As a sole proprietor, your business assets are not legally separated from your personal assets. However, it is beneficial to have a separate business account for your own sake. 

By having two separate accounts, you will be able to easily manage your business transactions and expenses and have a clearer view of your business’s profits. 

Complete the Paperwork

While you are not required to register as a corporation, you may have to complete some paperwork in order to kickstart your sole proprietorship. For instance, certain fields of work require specific licenses or permits in order to do business legally. 

It’s important to check with your local government office to make sure that you have fulfilled all legal requirements to establish your business. 

Acquiring a Small Business Loans With Seek Capital

While certain individuals may be able to launch their sole proprietorships with a strong vision and some hard work, many new small businesses require a little financial help. Luckily, receiving a small business loan may be easier than you think.

Seek Capital provides funding to startup businesses and other critical services to help business owners transform their vision into reality. With Seek Capital, you can get matched with lenders that will provide the best possible financial solutions for your specific business. 

Furthermore, Seek Capital allows you to compare the rewards, points, and interest rates of different credit cards, helping you to determine which is best for your business. With the aid of a small business loan and a credit card, you won’t have to wait to create your own sole proprietorship. 

How to Pay Yourself as a Sole Proprietorship

Since you are working as your own boss in a sole proprietorship, you may be wondering how you actually pay yourself. Unlike other business structures, sole proprietors don’t get paid by a salary. Instead, sole proprietors pay themselves with something called a draw. 

What Is a Draw?

A draw is an amount taken directly out of the company’s equity. So for instance, if you initially invest $50,000 into your company and then make $30,000 in profit, you have up to $80,000 to draw from. 

Of course, it is wise to leave enough money in your business to pay all your bills and allow it to grow. However, unlike a salary paid out at regular periods, you can make a draw at any time, for any amount you desire. The amount you draw should be determined by your specific needs/expenses and your company’s financial success. 

How to File Taxes as a Sole Proprietorship

Just as starting a sole proprietorship is easier than starting a corporation, paying taxes for a sole proprietorship is easier than doing so for a cooperation as well. As mentioned above, the IRS does not distinguish between you and your business in the case of a sole proprietorship.

However, you will need to submit a schedule C form as well as your standard 1040 form. Schedule C reports your business income, while Form 1040 reports your business income. In addition to your state and federal taxes, you’ll also have to pay a self-employment tax. This is in lieu of the social security and medicare tax you pay when you are working for an employer. 

Obstacles of Running a Sole Proprietorship

While running a sole proprietorship is an extremely rewarding experience, it does come with downsides. Let’s break down some of the obstacles you may encounter while starting out. This is not to discourage you but rather to make you better prepared if and when these issues arrive. 

Legal Responsibility

Unlike a corporation, you are solely responsible for any debts and obligations of your business. For instance, if a sole proprietor is being sued, they can lose personal assets such as a car or even a home in order to cover damages. 

Financial Responsibility

Furthermore, sole proprietors may have trouble acquiring investors while looking to grow their business. Because sole proprietorships are not corporations, they are unable to go public, which may steer away from potential investors. 

Work Load

While being your own boss creates a profound sense of freedom, it also presents a fair amount of challenges. Running a business is a lot of work, particularly if you don’t have any help. When starting a sole proprietorship, be prepared to wear many different hats and commit a significant time commitment. At the end of the day, you alone are responsible for the success or failure of your business. While it can be intimidating, this fact may only motivate you to work even harder. 

What Are You Waiting For?

Millions of Americans dream of starting their own business, and just as many see their dreams become a reality. With all the information discussed above, you’ll have a basic knowledge of what it takes to kickstart your sole proprietorship. Now, it’s up to you to take the leap and become your own boss today. 

 

Sources:

IRS | Sole Proprietorships 

Startups.com | Sole Proprietorships: What You Need to Know).

The Balance | How a Sole Proprietor Pays Income Tax and Other Taxes

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