Want to become a sole proprietor ? Starting a sole proprietorship is made easy here. Follow the step by step guide below and learn how to form a sole proprietorship.
In case you don’t know: A sole proprietorship, also known as the sole trader, individual entrepreneurship, or proprietorship, is a type of enterprise that is owned and run by one person and in which there is no legal distinction between the owner and the business entity. (source: wikipedia.org)
Tip of the Day: There is no personal asset protection available in a Sole Proprietorship. That’s why forming an LLC is a better option for small business owners. We recommend you set up an LLC in – by doing it yourself or getting an LLC service in your town.
Become a Sole Proprietor | Step by Step Guide
Luckily! There is no setup fee and you would not face too much hassle while starting a sole proprietorship in comparison to the legalities and paperwork that people face in other business structures.
To be a sole proprietor, you simply have to follow a few simple steps to keep things smooth. Here are those five easy steps you need to follow to become sole proprietor.
- Select an appropriate business name
- File for DBA (Doing Business As) name
- Obtain EIN (Employer Identification Number)
- Enlist Taxation Requirements
- Obtain business permits, licenses, and zone clearance
#1: Select an Appropriate Business Name
A sole proprietor can use his/her own given name or may opt for trade or assumed business name.
However, a tradename sounds more professional than the owner’s personal name. DBA (Doing Business As) name plays a pivotal part if you prefer to choose an assumed business name.
The state law requires the DBA must be distinguishable from the companies/businesses that are already on record.
Tidbit ! Keeping the common and federal laws of trademark protection in mind, it is wise to avoid a name that is too similar to another registered business.
Check the following government databases to make sure your fictitious or DBA name has not been trademarked already.
- Secretary of State
- The United States Patent and Trademark Office (USPTO)
#2: File for DBA (Doing Business As) Name
Most of the States have no legal requirement for registering a DBA name. However sole proprietors prefer to register their DBA since the registered business name seems trustworthy and customers feel more comfortable in doing business with such companies.
You can register your DBA with the state using the online facility of the relevant Secretory of State.
You also need to file a paper registration in the county where you plan to do business. Most commonly this is done by publishing your DBA and provide the proof of publication to the local government.
#3: Obtain EIN (Employer Identification Number)
Usually, a sole proprietor without any employee does not need any federal tax ID or EIN. Such proprietors use their social security number (SSN) for things EIN is used for.
But most of the sole proprietors, for privacy reasons, do not use their SSN and get an EIN. If a sole proprietor wishes to have employees, he/she needs to obtain an EIN.
Tidbit! Some banks may require an EIN to open a business bank account and EIN also reduces the risk of identity theft.
EIN is a 9-digit number issued by Internal Revenue Service (IRS) for tax reporting.
Every business having employees needs to report wages and various employee reports to the IRS through EIN. You can get an EIN online on the IRS website.
#4: Enlist Taxation Requirements
Which taxes apply to you as a sole proprietor is determined by the nature of your business. State and local tax both apply to a sole proprietor.
Commonly state tax includes sales and uses tax. Depending upon the nature of your business some additional taxes may also apply to you such as franchise tax, excise tax, etc.
To determine your state-level tax, you need to visit the business tax section of the Department of Revenue website.
Local taxes may also apply to your business depending upon its location. Go through the detailed city business tax list issued by the state government.
Also, visit the websites of your local government to make sure you fulfill all the tax requirements.
#5: Get Business Permits, Licenses, and Zone Clearance
Most of the states do not require a general business license by a sole proprietor but depending on the nature of the business activity you may need to acquire a business license to work in a compliant manner.
Which state-level license your business will be needing depends upon the services or goods you offer as a sole proprietor.
The license and permit section of the State Government website provides comprehensive information regarding the occupation or profession that requires a state license.
Additionally, local regulations such as building permit, license, zone clearance etc may apply to your business. You need to check the license requirements of the county in which you intend to operate as a sole proprietor.
Moreover, a sole proprietor with the taxable sales greater than $10,000 must obtain a standard business license from the local county clerk. In case your sales are less than $10,000. You may still need to get a minimal activity license from the local county office.
State Department of Revenue website, Registration, and Licensing section provides in-depth information on such licenses.
After You Establish a Sole Proprietorship
Once you have established a sole proprietorship, the following are the important things you need to do to keep your business running streamline.
- Set up a business bank account
- Obtain general liability insurance
- Report and pay taxes
Set up a business bank account
Using your DBA name and EIN you should get a business bank account to keep your personal and business finances separate to avoid any confusion.
Moreover, having a business bank account sounds more professional and safer to customers.
Obtain general liability insurance
Unlike LLC, sole proprietors are personally liable for all business obligations and debts, obtaining general liability insurance may be the only way to protect yourself against unforeseen circumstances.
Report and pay taxes
Depending upon the particular business activity, you need to be vigilant in paying all the taxes that you are supposed to pay. In addition to that, you must keep track, and record of your taxes.
Must Known Things Before Getting Sole proprietorship As a Business Model
Before starting your business as a sole proprietor, the following are a few important things you must keep in your mind.
No discrimination in personal and business assets
A sole proprietor can claim any profit or loss on his personal tax returns since there is no difference between the owner itself and the business.
Moreover, a sole proprietor can comingle his/her personal and business assets as much as he/she wants.
Tidbit! Sometimes it becomes difficult to manage the business and personal expenses and withdrawals from the same account. It is wise to have your business account separate from a personal one.
The owner can write check using his personal name and the same customer can write checks to business using sole proprietor’s name. In more formal businesses such as LLC and corporation, owners are required to keep their personal assets separate from those of the company.
No protection of private assets during unforeseen circumstances
The drawback of this aspect is in case a sole proprietor’s business in sued the creditors are free to pursue the personals assets like:
- Bank accounts
- Personal vehicle
- and home of the sole proprietor.
In the case of LLCs and corporations, creditors are only limited to business assets.
Vigilance in issues of taxes and license issues
When it comes to filing license or permits request, dealing tax issues or even the name of your sole proprietorship you are required to be very vigilant.
Make sure nothing is overlooked. You need to protect yourself from identity theft and there is less room for mistakes at the business place as your personal and business assets both are at stake.
Sole Proprietorship or General Partnership (with employee)
Please review the following outline. Should you require further assistance, contact us through the online inquiry form.
SUMMARY (Follow steps 1-5 in the order presented):
- Check business name availability
- Local considerations – planning and zoning, tradename certificate with the town clerk, fire and health
- Step three.
- a. Register with the U.S. Internal Revenue Services for a federal employer (FEIN) tax id number – SS-4 (online, mail, fax)
- b. Register with the Department of Revenue Services for a state tax id number – REG-1 (online, mail)
- c. Register with the Department of Labor as an employer and the state unemployment insurance tax – UC-1A (online, mail)
- Obtain appropriate trade or occupational license
- Step Five.
- a. Obtain worker’s compensation insurance
- b. Verify employment status with the Bureau of Citizenship and Immigration Services
It is strongly recommended that you seek the assistance of a business attorney and tax accountant.
Partnerships should create a partnership agreement. Consult with a business attorney.
Sole Proprietorship or General Partnership (without employee)
The rules and the procedure of the Sole Proprietorship without employee are the same except in case If you are not planning on hiring employees, disregard the information pertaining to registering as an employer.
1. Business Name Availability
Check to make sure that the business name you chose is available to use
2. Local Considerations
Contact the local planning and zoning office for zoning regulations for your location.
Some businesses need to also contact the local health and fire official.
Register a trade name certificate (often referred to as a DBA or fictitious name) with the town clerk in the town in which the business is based.
Some towns provide forms online. Sole proprietorships and general partnerships do not register with the Secretary of the State.
3a. Register with the U.S. Internal Revenue Services
File form SS-4 to obtain a Federal (Employer) Tax Id Number (FEIN).
This form is used to register you with the IRS as an employer for federal income tax reporting and should only be filed when you are ready to hire employees.
If not hiring, often banks require it for banking purposes. Check with your bank regarding their requirements.
Online filing is available or obtains immediately by calling 1-800-829-4933. Agency web site: www.irs.gov
Note: Federal labor posters
3b. Register with the State Department of Revenue Services
File form REG-1 (online, mail) for the state sales and use tax and income tax withholding if hiring. Also, be familiar with the reseller’s certificate.
Please contact the agency directly or visit the agency website to research whether your product or service is subject to sales tax.
Review: Getting Started In Business – IP 2006(11), Employer’s Tax Guide – IP 2013.
Contact the agency: (860) 297-5962, 1-800-382-9463 (Connecticut only) or [email protected].
3c. Register with the State Department of Labor
File form UC-1A (online or mail) for the state unemployment insurance tax if hiring employees.
Review: Employer’s Guide to Unemployment Compensation and labor posters. Fax and online filing available.
Contact the agency: 860-263-6550 (Employer Status), 860-263-6567 (Fax) or [email protected]. Agency website:
Some businesses require an occupational or trade license. Search the licensing database on www.CT-CLIC.com or inquire with our office: 1-800-392-2122 or online inquiry form.
5a. Obtain Workers’ Compensation Insurance
Secure workers’ compensation insurance through a private insurance company. General partnerships are required to obtain workers’ compensation insurance even though they do not hire employees.
However, such organizations can exclude themselves from coverage by filing form 6B. For further information contact Workers’ Compensation Commission at 1-800-223-9675 or [email protected]. Agency web site:
5b. Employment Eligibility Verification
If hiring employees, become familiar with the regulations for form I-9 from the Bureau of Citizenship and Immigration Agency.
Contact the agency: 1-800-357-2099. Agency web site: http://www.uscis.gov.
It is strongly recommended that businesses contact their insurance agent to inquire about proper insurance coverage including workers’ compensation insurance.
- SBA – Small Business Resource Guide
- Business Response & Licensing Info Center
- Research (Data) Services & Town Profiles
- Small Business Development Center (SBDC)
- Women’s Business Development Council
Every business model has some pros and cons. You need to think carefully before selecting any mode of business and carefully follow the requisites of that particular model.
We hope this article helped in getting insight and answered your queries related to sole proprietorship formation. You can visit our guide to small business models before making a final decision.