Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Do you have a great idea for a solo business venture? If you’re looking to start an enterprise independently but don’t know where to begin, keep reading for the steps to starting a sole proprietorship, including trademarking, licensing, taxation, and insurance.
What is a Sole Proprietorship?
A sole proprietorship, sometimes abbreviated as “sole prop,” is an unincorporated business. There is no legal or tax distinction between the business entity and the individual who owns it.
The U.S. Small Business Administration (SBA) calls sole prop “the simplest and most common structure chosen to start a business.” As a sole proprietor, you’re willing to take on all responsibilities involved to reap all the rewards.
Why a Sole Proprietorship?
By now, you’ve probably decided to move forward as the sole proprietor of your business. As it turns out, there are several benefits to choosing the sole prop route!
For one, you don’t need to navigate any red tape or muscle through the legalese to become a sole proprietor in the eyes of the law. People can be sole props without even knowing it! Independent contractors, freelance writers, and even babysitters run businesses entirely on their own: building an image, assuming liability, and profiting from their labor.
As a sole proprietor, you set your hours, keep all the profits, and reserve total control over your business. But you still need to complete some steps to bring your ideas to fruition. Requirements vary based on your location and type of business.
Starting a Sole Proprietorship
It can be confusing to know how to start a sole proprietorship. Here are the steps you should take to understand the details or intricacies throughout the process.
Step 1: The Idea
Decide what services your business will offer. Choose where you want to operate. Come up with a name, an image, a mission statement, and a vision for your brand.
Registration of your business is recommended, but it’s not required everywhere. Also, sole props have no personal liability protection, legal benefits, or tax benefits from the government in the US unless you acquire insurance to cover liabilities.
Step 2: Trademarking Your Business (Optional)
You have the option to file with the United States Patent and Trademark Office to trademark your business. This step isn’t required, but it’s a great way to protect your brand!
Step 3: Get An Employer Identification Number
An Employer Identification Number (EIN) allows your business to open a bank account, apply for business licenses and permits, pay federal taxes, and hire employees. Visit the IRS website to see if your business will need an EIN.
It may not be required for your business, but it’s free to apply, and you may need one to set up a business bank account (see Step 7). Not all banks require an EIN to set up a business bank account for a sole proprietorship. An EIN is recommended, though, because it protects the business owner’s Social Security Number from being disclosed on W-9s, 1099s, and other tax forms sole props often distribute or receive.
Step 4: Get a State Tax ID Number
Research your state’s income and employment tax laws. The SBA can direct you to any state’s online portal to get a tax ID. Having a state tax ID number comes with additional benefits for sole proprietors, such as protection against identity theft.
Step 5: Federal Licenses and Permits
Use the SBA’s licenses and permits page to find the federal organization that matches your business’s services. Visit the corresponding website to see laws, necessary licenses, permits, and fees for officializing your business. Your business may not match any of these, and that’s okay! Find out what you need at the state and local levels.
To make sure you know all requirements, call the agency and confirm that online information is up-to-date.
Step 6: State/Local Licenses and Permits
Now, research the requirements for legalizing your business within the state, county, and city you’ll be operating out of. These should also be easily accessible online. Call each department to confirm the information at all three levels.
Now that you know what fees correspond with making your business legal, you can calculate your startup cost and get ready to bring your idea to life!
Step 7: Opening a Business Bank Account
You should open a bank account specifically for your business once you have a location, a trademark, and the proper permits.
You may choose to set up more than one bank account, as different types serve different purposes. The SBA states, “Common business accounts include a credit card account, checking account, savings account, and a merchant services account. Merchant services accounts allow you to accept credit and debit card transactions from your customers.”
Remember, besides licenses and permits, you’ll need an EIN to open a business bank account.
Find a bank with low fees and customer benefits. A business bank account will protect your sole proprietorship and strengthen the professionalism of your brand.
Step 8: Get Business Insurance
There are six kinds of business insurance commonly used by business owners.
- General Liability Insurance
- Covers financial losses resulting from injury, medical expenses, property damage, libel, slander, lawsuits, and settlements.
- Product Liability Insurance
- For businesses that manufacture, wholesale, distribute, and retail a product. It protects against financial loss as a result of a defective product that causes bodily harm.
- Professional Liability Insurance
- For businesses that offer services to customers. The coverage protects against losses due to malpractice, errors, and negligence.
- Commercial Property Insurance
- For businesses with a significant amount of property and physical assets. This might not be necessary for your sole prop, but it protects your business from losses and property damage due to fire, storms, and vandalism.
- Home-based Business Insurance
- Needed if you plan to run a sole prop out of your home. It’s added to existing homeowners’ insurance to protect small amounts of business equipment and provides liability coverage for third-party injuries.
- A Business Owner’s Policy
- Combines all the coverage options into a single package. This simplifies the insurance-buying process and saves you money. Most small business owners, particularly sole proprietors, choose to go this route.
Find a reputable insurance agent who cares about your business’s needs as much as they do their commissions. Compare rates, terms, and benefits from multiple agents.
The Last Word
That’s it! The SBA offers free local business counseling if you’re still feeling lost. Starting a sole proprietorship is quite a process, but the benefits are immeasurable.
Once your business has an EIN and state tax ID, is properly licensed, has its bank account or accounts, and is sufficiently insured, nothing stands in the way of your total control, total independence, and total access to profits! Good luck!
Filed under: Advice Columns