By Hanna Hasl-Kelchner, The No Nonsense Lawyer™
If you’re bitten by the entrepreneurial bug and ready to strike out on your own, the sole proprietorship is the quickest and easiest way to get into business for yourself. It typically requires few if any legal documents and minimal record keeping.
Proprietorships typically operate under the name of the owner. But if you prefer to do business under another name, that works too. Operating under a snazzy fictitious name or a “doing business as” (DBA) name, as it’s commonly called, requires filing a form in the state or county where you plan to operate.
It’s important to note that the DBA filing should occur before you start using your DBA name. It’s a relatively simple form. Check with the Secretary of State where you plan to operate for details about specific filing requirements and where to get the form. Remember, the staff at the Secretary of State office want you to be successful and will be more than happy to answer your questions and help you find what you need. You can find Secretary of State contact information in your local phone book under “government” or online.
Before you get your business cards printed and hold a grand opening, there are a few more things you need to know about sole proprietorships. Ease of formation and record keeping are only one of five factors to consider before deciding whether a sole proprietorship, or any other form of business, is right for you. The other factors are: legal liability, tax reporting, management and ownership flexibility, and your future plans.
As the name suggests, a sole proprietorship begins and ends with you. Legally, you have full control and responsibility for all business decisions and profits. That’s the good news. But along with full operational control comes full personal liability for all business obligations. That’s the bad news. It means creditors, including judgment creditors, can go after your car, your house, and your bank account. Those assets are not shielded the way they are in other business structures.
From a tax perspective, sole proprietorships are not treated as separate taxable entities. What that means for you is that business income is taxed only once and reported on your personal tax return. Being a sole owner also means that by definition ownership is limited to one owner — you. If you die your business could die with you. If you’re incapacitated due to sickness or personal injury, your business could suffer. Also, as a practical matter, because you and your business are essentially one, it may be more difficult to obtain long-term business financing.
Bringing someone else in, whether a spouse or other family member, to share the responsibilities of ownership helps with succession planning and improves the odds that the business can survive without you. But once you share ownership with someone else your business stops being a proprietorship. It automatically becomes a partnership even if you do nothing to set one up.
Partnerships operate under a different set of rules. The failure to recognize that fact could lead to unwanted surprises if your business accidentallyy converts to a partnership and you don’t know it. (See Step 2: Decide If a Partnership Is Right for You).
Your future plans will also influence your decision about whether a proprietorship is for you. If, for example, you plan to ramp up your business with venture capital and go public in a few years, a sole proprietorship is not your best choice. But if you want to be self-employed and believe there’s minimal risk to your personal assets, a sole proprietorship might be a good fit.
Your tax advisor and attorney can assist you in evaluating if it’s right for you. If at a later date your needs change, or you wish to shield the wealth you’ve created as a sole proprietor, they can also help you transition your business into a partnership or corporation.