A sole proprietorship registration is an unincorporated business which is owned, controlled and run by an individual. The sole proprietor is one who is entitled to all profit and liable for all losses, liabilities, and debts.

It is the easiest business type to start and operate also you don’t need to get registered formally with your states like corporations or LLCs do. Over 23 million people are sole proprietors and also it represents 73% of all businesses in the US today.

Business with small capital requirements and low level of risk are opted for being run as a sole proprietorship.

Steps to starting a Sole Proprietorship

All a sole proprietor business owner needs for the startup is:

Name of a business

The first step is the selection of a business name. The business name is important because all the decisions and all the legal actions are always taken in the name of a business, like:

  • Business name will be featured by all advertising and market material.
  • The business name is important for any kind of business loan, and documentation.
  • Business name will carry:
    • Office forms
    • Stationery, and
    • Business cards

The name of a sole proprietorship must be registered with the locality and state where the business is organized and situated. It must file a fictitious name statement if in case the business operates under another name.

Consideration in selecting a name

  1. Check the availability of the name which is selected for the business.
  2. Search for the name in your state’s business division database.
  3. Check the name with the U.S patent and trademark office and if the name is already taken by someone then you need to look forward to another name to avoid any legal issues.

Trademark your business name

A name of a business is an intangible asset. If the name is unique or you intend to use your business name online than you should go through the trademark process. It prevents the name and gives an advantage in a lawsuit.

A business checking account

A sole proprietor is a business entity which is not separate from the owner. It will be preferable if a sole proprietor maintains the business and personal account separately, it is more beneficial and easy to maintain all business expenses which are being claimed as a tax deduction for the business.

Legal requirements

A sole proprietorship is needed not to get registered with the state but there are legal requirements which should be considered are given below:

  • Get a business license with your locality.
  • Apply to the state for sales tax permit.

Sole Proprietorship registration

The process of the company registration of sole proprietorship is not same as the process of the registration of LLC or a corporation. While setting up a sole proprietorship you will simply declare business as a sole proprietorship and there is no need for filing any paperwork with the state creating a corporation.

It receives a business license and tax registration certificate. A sole proprietor should get federal employer identification number from the internal revenue service a license to sell from your state and a permission from the local board it is required.

How a Sole Proprietor pays tax?

  1. The income of the sole proprietorship is taxable otherwise the business is not taxed separately. The sole proprietor has to file income, losses, and expenses with Schedule C and the standard form 1040. You can visit here for tax return filing
  2. The sole proprietorship pays income tax by completing a schedule C and include the income on the owner’s personal tax return.
  3. A sole proprietor can include home business expenses if he operates a business from home and traveling expenses which are for a business purpose.
  4. The income from Schedule C is entered on line 12 of form 1040 along with the income from other sources.
  5. Self-employment tax is added after the income tax is calculated. The self-employment tax and income tax are a total tax liability.

What must a sole proprietorship do in addition to income tax?

  1. Sales tax must be collect and pay on taxable goods and services.
  2. On any real property tax must be paid.
  3. Employment must be collect, report, and pay if the sole proprietorship has employees.

Legal requirements for running a sole proprietorship business

  • The proprietor must have a PAN card as all the returns are filed in the proprietor’s name.
  • Business with the turnover exceeding INR 9 lakh needs to pay a 10% service tax and also need to be registered.
  • If a business involves a procurement and sales of taxable goods then it needs to be get registered for Value Added Tax.
  • If the buying and selling is across different states then registration for Central Sales Tax is mandatory.
  • The proprietor can run the business from the home then the provision of the Shop and Establishment Act need to comply with.

Advantages of Sole Proprietorship

A sole proprietorship is a business which is easy to establish and run also there is no profit sharing, here are few advantages of a sole proprietorship are given below:

Less cost consuming

A sole proprietorship is a kind of a business which is least expensive also the simplest form of a business structure. A sole proprietor has to pay only a legal cost to obtain the necessary license or permits rest the cost in a sole proprietorship is minimal.

Sole control

The owner of the sole proprietorship is the sole owner of the business and have control over all decisions. A sole proprietor is not required to take permission or consent of any other person before taking any decision.

Tax benefits

The business is not taxed separately which makes easy to fulfill the tax requirements for the sole proprietorship also the tax rates are comparatively less of this business structure.

Quick decision and flexibility

It is a business entity which can take a quick decision as there is no need for a consent of numerous people the decision can be made quickly and hence it is flexible too.

The adequate relationship between employee and the customer

This business model is found in a linework where the business and personal relations are maintained in a very fine way as there is a direct interaction between the customer and the employee also it helps in receiving the direct feedback.

Ensuring the safety of the business

The safety of the business secrets is also a much easier task in the sole proprietorship, there is no such risk like other business has.

Disadvantages of a sole proprietorship

Unlimited liability

The sole proprietorship is owned and controlled by a single person where there is no profit sharing and no sharing of any loss and debts also there is no restriction on the borrowings and the sole proprietor is personally liable for all the debts and obligations of the business. However, this extends the risk as a result of employee actions.

Hard to raise money

As a business is owned and controlled by a single person and proprietor often face challenges while raising money. A sole proprietor cannot sell stock in the business which limits investors opportunities also there is a huge risk in repayment of the load because of which bank hesitate to provide a loan to the sole proprietorship. If the sole proprietor wants to raise the money or wants to take help in getting the business loan then you can go to the link.

Heavy burden

In a sole proprietorship, the entire burden is on the single person, which can not be shared or transferred from one person to another.

What makes sole proprietor unique?

  1. It is the business entity which is most easy to form without any requirement to get registered with a state.
  2. It is easy to run and there are no regulations regarding meetings, the board of director, etc.
  3. The owner of the business is not accountable to anyone also he has complete control of the business in his hand.
  4. There is no profit sharing in the sole proprietorship but the owner has to take all the losses alone.

Get legal help in setting up your sole proprietorship

It is relatively easy to set up the sole proprietorship with the help of an attorney but if one has some doubt or questions regarding the liability, taxes and another risk then the person can take help and guidance in the process of setting up of the business of any business organization attorney.

Distinguish between a Sole Proprietorship and One Person Company

Sole ProprietorshipOne Person Company
Sole Proprietorship liability is unlimited and extend to the individuals assets.One Person Company allows for the limitation of liability.
The audit would need to be carried out only as per the Income Tax Act on the turnover exceeding the threshold.All resolution passed have to be entered in the minutes book and provision relating to the financial statement, accounts, and audit.
To set up the sole proprietor no paperwork is required.For setting up the OPC the time and paperwork is required.
It is not expensive and time consuming.It is expensive and time consuming.
No requirement of hiring a lawyer and a company secretary in sole proprietorship.There is a requirement of hiring a lawyer and a company secretary.

By Akanksha Singh