USA: Establishing Your Sole Proprietorship

If you’re a freelancer or a solo business owner, you’re probably interested in establishing your business venture as a sole proprietorship. Just because you’re independent doesn’t mean you need to go it alone; we’ve round up the essentials for establishing your venture.

How can you register as a sole proprietorship in the US? In this article, we’ll delve deeper into this business structures and give you valuable advice for registering your personal business, and be sure to check out our rundown of common business structures if you’re looking into how to launch your company. A sole proprietorship is a one-person business that, technically, can exist without being registered with the state, although certain states do require that you register for a business license if you want your business to function entirely within the confines of the law. This means that it’s possible you already have a sole proprietorship, and stand to benefit from registering your business properly.

It’s a good idea to register your sole proprietorships with the state, even if your state doesn’t require that you do, especially in the event that your small business experiences problems or debt. The legal terms of your business should always be clear from the beginning. Keep reading for information on how to register.

Sole Proprietorship

The majority of businesses begin as sole proprietorships, which is the term applied to any one person conducting a business activity — that is to say, offering a product or service to paying customers. As soon as you do this, you are operating as a sole proprietorship; getting properly registered and treating your activity as a business in and of itself will be helpful for revenue and avoiding problems that may arise in the future. You can always change your sole proprietorship to a partnership, LLC, or even corporation one day, should you wish to do so.

However, one of the tricky aspects of the United States is the fact that all states have different registration methods. In order to obtain an official business license, get in touch with your state’s Small Business Administration Center for information on the paperwork and other formalities that you’ll need to fill out and satisfy in order to register.

Before You Register

Before you start any business, especially if you’re striking out on your own, your business plan is an essential element to pin down even before you start thinking about registering your enterprise and making it official. Even if you aren’t looking to attract investors (if you’re a freelancer, for example), laying down a solid business plan to forecast the first years of your activity is important for your goal-setting and the future success of your business. Before you do anything else, check out our free business plan templates to help you get started!

Of course, you’ll need to choose a name. You can either operate under your own name or choose a specific one to reflect the products and/or services you offer (known as a DBA, or Doing Business As title). This will be important for your communications material and your website, so choose wisely. Especially if you aren’t simply using your own name, make sure that the name isn’t currently in use in the state in which you register your business, or any states in which you might like to register in the future. If you choose a business name or a DBA, it’s a good idea to trademark it as soon as possible (learn more about trademarking here.)

You’ll also need to open a business bank account in order to separate your personal assets from your business assets. It will also make filing paperwork and tax documents easier and more organized in the future when your business expenses are isolated from your personal ones. Your business account should be exclusively for business income and expenses, and this is when you can begin record-keeping for your business’ income. Showing the IRS that your personal and business assets are separate will demonstrate that your sole proprietorship is a for-profit enterprise: this means that losses in the first couple years of your business could be deductible.

Once you’ve taken care of this, file for a business license with your locality. Thankfully, legal resource Nolo has a 50-state guide to the specifics of registering a sole proprietorship in each of the fifty United States. https://www.nolo.com/legal-encyclopedia/50-state-guide-establishing-sole-proprietorship.html

Taxes

Eventually, you’ll file taxes with the IRS for your sole proprietorship in order to declare your income and expenses: Schedule C (or C-EZ) on Form 1040. Register with your state’s Department of Revenue to know exactly what you’ll owe on your business and self-employment taxes; If you’ve made a profit, you’ll owe self-employment taxes on top of your business’ taxes. If you have no employees, you can file using your own Social Security Number. However, if you do have employees, you’ll have to request an Employer Identification Number from the IRS here.

You’ll also need to get in touch with your local Small Business Center to check if you need to be collecting sales tax to turn back over to the state. Sole proprietorships are considered “pass through” businesses, as the profits and losses will pass through the owners personal tax return — unlike a corporation, a sole proprietorship  is inextricably linked to its owner. Luckily, sole proprietorship tax rates are the best in the business world. But be careful: make sure that you aren’t required by your state and activity to pay excise taxes, and keep in mind that if your sole proprietorship ever comes to own property or have employees, it will owe property taxes and/or employment taxes such as unemployment, worker’s compensation, and more. Employment taxes do count as deductible business expenses. 

Insurance

You’ll need to consider insurance: keep in mind that in the United States, virtually all forms of insurance fall to the responsibility of the individual. If you don’t have health and disability insurance through a family member or a former job, you’ll need to look into acquiring private health insurance. Homeowners insurance also doesn’t always cover liability or home-based business ventures: check with your homeowner’s insurance to make sure you don’t need added liability coverage. Furthermore, if you’re driving your car for business-related reasons, you’ll want to call your auto insurance company and extend your vehicle coverage.

All of this may sound a bit overwhelming, but it really is quite manageable. Starting out at a sole proprietorship, as long as you check that you’ve crossed your proverbial t’s and dotted your i’s, is as simple as any nascent business venture gets. The United States’ state-level legislation can seem a bit daunting, but as long as you’re familiar with the practices in your home state thanks to the links in this article, you’ll find it all seems much simpler. Don’t hesitate to leave questions in the comments section, or any comments about subjects you’d like us to address in greater detail.