Whether you’re starting a freelance business or opening a small shop, registering as a sole proprietor gives your business a solid legal foundation. Establishing a sole proprietorship is one of the simplest ways to start your own business. It’s also among the most common – more than 86% of non-employer firms in the US are sole proprietorships.

Below, we’ll cover what you should know about registering a sole proprietorship, from choosing a business name to taxes to determining if you need any special licences or permits.

What’s in this article?

• How to register a sole proprietorship
  
• How to choose the right business name for your sole proprietorship
  
• Taxes for sole proprietors
  
• What licences or permits does a sole proprietorship need?
  
• How to protect your personal assets when operating a sole proprietorship
  

How to register a sole proprietorship

A sole proprietorship is a business structure in which an individual operates and owns the entire business. It’s the simplest, most common form of business ownership. In a sole proprietorship, there’s no legal distinction between the owner and the business, which means the owner is personally responsible for all business debts, liabilities, and legal obligations.

One of the main benefits of a sole proprietorship is that it’s easy to establish and often does not require formal paperwork or registration, depending on your location. The downside of this type of business structure is the lack of separation between personal and business assets, meaning your personal wealth could be at risk if the business runs into financial or legal trouble. The business’s profits and losses are treated as part of the individual’s income and taxes are filed through the owner’s personal tax return.

How to choose the right business name for your sole proprietorship

Choosing a business name for your sole proprietorship is an important early step. Here are some factors to consider when choosing a name:

• Choose a clear, specific name that conveys something about your business. Think about what you offer and choose words that will connect with your customers.

• Choose a simple name, one that is not difficult to say or spell.

• Check if your preferred name is taken. You can search online, check if the domain is available, and look up your state’s business name registry. Additionally, check the trademark database to ensure the name isn’t trademarked.

• Choose a name that will still make sense if you decide to expand your services or products in the future.

• If you’re going to have an active online presence, check if the domain and social media handles are available. Stay consistent across platforms to make it easier for people to find you.

Taxes for sole proprietors

Taxes for sole proprietors are relatively simple, but there are a few things you should know for compliance purposes and ease of filing. Here’s a closer look:

• Self-employment tax: As a sole proprietor, you’re responsible for paying both income tax and self-employment tax. This covers Social Security and Medicare, since you don’t have an employer paying part of those taxes for you.

• Income tax: As a sole proprietor, you report your business income on your personal tax return using Form 1040. Basically, you’re telling the IRS how much money your business made (or lost) and subtracting your business expenses to determine how much of it is taxable. Your business earnings are then taxed at your personal income tax rate. This is known as “pass-through” taxation, as the business’s tax obligations are passed on to the owner’s personal tax return.

• Estimated quarterly taxes: Because you’re self-employed, you don’t have taxes withheld from a pay cheque. Instead, you’re expected to pay estimated taxes every quarter to avoid penalties at the end of the year. Set money aside throughout the year to pay at regular intervals and avoid penalties.

• Business expenses: As a sole proprietor, you can write off many of your business expenses to lower your taxable income. These expenses could include supplies, advertising costs, office space (even a home office), and professional services. Keep careful records of all business expenses in case the IRS asks for them.

• Self-employment tax deduction: You can deduct half of your self-employment tax when you file your personal income taxes, because the IRS treats you as both the employer and the employee.

• State and local taxes: Depending on where you live, you might have to pay state and local taxes. Each state has its own rules, so consult a local accountant or tax expert.

What licences or permits does a sole proprietorship need?

Even though a sole proprietorship is one of the simplest business structures, you might need a few licences or permits to operate legally. Check with local and state agencies about any specific permits you might need. Here are some licences and permits that might be required:

• Business licence: Many cities and counties require that you have a basic business licence to operate. This can depend on your location and the type of business you’re running, so check with your local government offices to see if you need one.

• “Doing business as” (DBA): If you’re not using your legal name as your business name, you’ll need to file a DBA or trade name. This lets you operate under a business name that isn’t your own, which can be important for branding or to give a clearer sense of what your business does.

• Professional or occupational licences: Some industries require specific licences or certifications. For example, if you’re a hairdresser, real estate agent, or contractor, you might need a special licence to provide those services legally. These requirements vary by state and profession, so check with your state’s licensing board.

• Health permits: If you’re in food service or another industry that involves health and safety regulations, you’ll probably need health permits. This is common for restaurants, food vans, or any business that handles food and beverages.

• Zoning permits: If you’re running your business out of your home, you might need to research zoning laws. Some areas have strict regulations about what kinds of businesses can be run from residential properties. You might need a permit to be compliant.

• Sales tax permit: If you’re selling physical products, you’ll need a sales tax permit so you can collect sales tax from your customers. The rules vary by state, so check with your state’s tax agency to see what the requirements are.

• Federal licences: While it’s not a common issue for sole proprietors, certain industries such as broadcasting, alcohol, and firearms require federal licences. If you’re in a field that’s heavily regulated by the federal government, ensure you’re following federal rules.

How to protect your personal assets when operating a sole proprietorship

With a sole proprietorship, it’s important to protect your personal assets because there’s no legal separation between you and your business. Here’s how you can minimise your risk:

• Get liability insurance: Since a sole proprietorship doesn’t shield your personal assets from business liabilities, you should invest in business liability insurance. This can cover legal costs, property damage, or accidents related to your business. There are different types of policies for different industries, so find the right coverage for your specific risks.

• Separate personal and business finances: Keep your business and personal finances separate by opening a business bank account and using it exclusively for business transactions. This will simplify your taxes and protect your personal assets by showing that you treat your business as a distinct entity.

• Use contracts: Ensure all communication and agreements with clients, suppliers, and partners are put in writing. Contracts can help protect you from misunderstandings, disputes, and liability. If something goes wrong, a contract can also serve as legal protection for your personal assets.

• Consider a limited liability company (LLC): If your business is growing or you’re concerned about risk, you might want to consider converting your sole proprietorship into an LLC. An LLC can separate your personal assets from your business liabilities. So if the business is sued or runs into debt, your home and personal savings won’t be at risk.

• Be cautious with debt: Avoid using personal assets as collateral for business loans. If your business defaults, you could lose those assets. When possible, look for financing that doesn’t require personal guarantees, although this can be tricky with a sole proprietorship.

• Stay compliant: Ensure you’re following all local, state, and federal regulations, from paying taxes to getting necessary permits. Legal trouble can lead to personal liability. Stay compliant with laws and regulations to keep your personal assets safe.