Want to start a business quick, but don’t know how?
The easiest and most common business to start is a sole proprietorship. All that is needed is a product or a service and a decision to do business. Viola! You now own business. There aren’t any legal steps to take at the state or federal level.
You will have to get a business license or permit with the city or municipality you will be conducting this business in. This basically requires filling out an application and paying a fee.
To understand how a sole proprietorship works, it means that the business is unincorporated. This means that you own the business by yourself and there isn’t any separation between you and the business. You get all the profits as well as suffer all the losses, liabilities and are responsible for all debts. This could be a thing like: defaulting on a loan, not enough money to pay suppliers or lawsuits. Creditors will have the right to sue for your personal belongings.
A sole proprietorship can be operated under your legal name, but if you choose to do business with a trade name, then you will have to file a fictitious name, same as a DBA (doing business as) name. Just be sure to research that no one else is doing business with that name to avoid conflict.
Once your business is established, consider forming an LLC at least to ensure your personal property is kept out of the hands of creditors. If that isn’t an option for you, then opt for the following insurance types: Health Coverage, Auto Insurance, Disability, Property, and Liability coverage for personal protection.
How do taxes affect the sole proprietor?
Remember earlier how I said there isn’t any separation between you and the business? Well, this affects how the business is taxed. Since you and the business are one and that makes the business income your income. You don’t get taxed separately like for a corporation. You would file a Schedule C or Schedule C-EZ, which is part of the 1040 tax form. If you don’t have employees, then you would use your social security number and not have to worry about having an EIN.
If your business starts rolling in the doe, so to speak, then you’re required to pay self-employment tax. It is wise to put money aside periodically to cover this expense.
Are there any drawbacks to being a Sole Proprietor?
Yes, there are a few drawbacks. There’s the unlimited personal liability you are responsible for since there isn’t any separation between you and the business.
There’s also a challenge to raising money because there aren’t any stocks in the business to sell, which ultimately means there won’t be any investors.
Banks are also hesitant to lend money because sole proprietors tend to appear untrustworthy to pay back a large sum of money if the business goes under. Business credit is an alternative funding source.
As a sole proprietor, you are ultimately responsible for the success of your business. The good thing about that is you have complete control over all decisions and can change the structure whenever you want. Starting this type of business is the easiest and least costly business structure to establish.