ComplianceFinanceLegalTax & AccountingNovember 24, 2020

Starting a sole proprietorship

A sole proprietorship is the easiest and least expensive way to begin operating a business is as a sole proprietorship. However, this organization form does not protect your personal assets from the claim of business creditors and offers limited tax planning options.

To operate your business as a sole proprietor is simple: You simply decide to begin operating the business as a sole proprietor and you're done.

There are no documents or forms needed, unless the business will operate under a name other than the owner's name. If the business will operate under a name that is different from the owner's name, most localities will require you to file a fictitious owner affidavit. A fictitious owner affidavit informs the local government and the public that the business is operating under an assumed name and indicates who owns the business.

Once you file your fictitious owner affidavit with the county clerk, make sure you keep a copy of it. You'll need it from time to time, such as when you open up a business bank account under the fictitious name.

If you operate under a fictitious name, make sure you file an affidavit in each county where you do business. If you do business across state lines, it gets trickier because the rules can vary among the states. In that event, you should discuss your options with your attorney or someone familiar with these laws.

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Choosing between your own name and a fictitious name can be a difficult decision. There are a couple rules of thumb. If you're reasonably well-known and well-respected in your community or in your business field, use your own name. It can be a great marketing tool.

However, there's a risk with using your own name. If your business fails or gets into financial or legal trouble, it'll have your name on it. If you try to start another business, people may associate your name with the earlier troubles.

You may also have to file forms if you need a business license. In some jurisdictions, a business cannot begin to operate unless the proper business license has been obtained by the owner. To find out more about the requirements in your locality, go to or call the courthouse located in your county and speak to the county clerk. The clerk should be able to answer any questions you have and to give or send you whatever forms you may need.

Sole proprietor's are exposed to liability for all claims

As the owner of a sole proprietorship, you will be personally liable for all obligations of the business. Personal liability allows creditors of the business to go after your personal assets if the business assets are not sufficient to cover the business debts. Likewise, your personal creditors can go after your business assets to satisfy your personal debts.

Since you will be personally liable for obligations of the business, you should consider whether the business will be exposed to any potential lawsuits. For example, the business can be exposed to liability for customers injured on the premises or from products sold by the business. If the possibility of lawsuits exist, you can limit your exposure by purchasing business insurance (general liability, malpractice, or product liability, if necessary). Alternatively, you might want to consider a different business form that would provide greater liability protection, such as a corporation or a limited liability company. 

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If you are not concerned with limiting liability because your type of business is virtually risk-free, a sole proprietorship may be the perfect vehicle in which to operate your business.

Advantages of a sole proprietorship

  • Control. The owner has complete control over the business.
  • Simplicity. A sole proprietorship is easy to start and operate.
  • Inexpensive. Startup organization expenses are minimal since few, if any, legal documents need to be created to begin the enterprise.
  • No double taxation. The business is not treated as a separate taxable entity. The business income is reported on the owner's individual tax return and is therefore only taxed once.

Disadvantages of a sole proprietorship

  • Liability. The owner is personally liable for any obligations of the business.
  • Limited ownership. A sole proprietorship by definition is limited to one person. Thus, if the owner wants to admit another owner, such as a spouse, family member, or friend, the sole proprietorship would have to end. A new business arrangement, such as a partnership, would be created either by default or by intent.

Sole proprietorships are not separate taxpayers

The tax treatment of a sole proprietorship is relatively simple. Business income or loss is reported on the owner's individual income tax return. The owner will most likely be subject to self-employment taxes unless the business is very unsuccessful. If the business will hire employees, a Federal Employer Identification Number will need to be obtained and payroll taxes will have to be paid.

 The Federal Employer Identification Number can be obtained by filing a Form SS-4, Application for Employer Identification Number
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