A Sole-Proprietorship is the easiest and most common structure chosen to start a business. It is an unincorporated business (not an actual entity like an LLC, for example) owned and run by one individual with no distinction between the business and you, the owner. You and your business are considered one and the same, where with an LLC you and your LLC are two different entities. As a sole-prop, you are entitled to all profits and are responsible for all your business’s debts, losses, and liabilities. Meaning, if your business is sued, you are personally liable and all of your assets will be at risk, depending on the legal situation.
Although a sole-prop is the easiest and typically the most popular, it is not recommended to be long-term due to the fact that everything falls on you personally as an individual.
Now let's dig a little bit further into questions I often receive about Sole-Proprietorship status:
1. Can 2 or more people own a sole-proprietor business?
No for the most part. A sole-proprietor means one (1) individual - however, some state law (4 states to be exact) allow a spouse to be added. If your state law allows this, you could possibly open yourselves up to a legal issue with clients, vendors, etc. They could argue that they were under the impression they were contracting with an individual sole-proprietor. Likely? Not really, but it is a possibility.
2. Will I be taxed twice?
No. You and the business are one and the same, therefore everything will be combined on your personal tax return.
3. Since my business and I are one and the same, can I use a personal account for the business?
No. A business structure does come into play with business accounts, but so do the type of transactions on the account. Obviously, they will be business transactions, therefore you are still required to be in a business account. Personal accounts are defined as personal, household or family purposes. Although we use our income for our household bills, that is the destination of that income, not the source and reason for the income.
4. Can I add other signers on my business account?
Yes. You can add any signers you would like, whether it's family members, employees or freelancers. It goes without saying, that you need to do your due diligence before adding them to ensure they are trustworthy. BUT, one BIG banking item is that since you and your business are one and the same, if you were to pass, the other signers on the account immediately lose their access and power over the account and all transactions will be stopped (incoming or outgoing). Another con in the sole-prop world. As a side note, you can not add a POD on a sole-prop account, or any business account regardless of the entity structure. ALTHOUGH, any remaining funds in the account will be passed on to your estate for your family to handle and they will need to pay any outstanding debts, such as payroll.
5. Can I get liability insurance to protect me?
Yes! And I recommend it if you think you will operate as a sole-prop for a longer time-frame. You can actually get liability insurance for decent prices. I personally pay $549/annually for $500K worth of protection. Keep in mind that not all policies cover gross negligence and items like that.
6. I was told I do not need to file anything to operate as a sole-prop.
Maybe - it depends on your State, City & County on what they do and do not require of you. More often than not, at least one will require a business license and most states require you to register a trade name (DBA = Doing Business As) if you will not be using your legal name (Some states it is your full legal name and some say your full legal last name) for your business name.
7. Do I have to use my social security number with clients?
Not at all! Run over to IRS.gov/EIN and grab yourself a free EIN in under 5 minutes! You will use that for all of your clients and for your business bank account. Go SLOW after you input your personal information because the last page that lists your EIN can easily be missed and you cannot go back.
8. Why should a Sole-prop only be short-term?
First, the liability that is placed upon your shoulders, and it is typically harder to raise money as everything is dependent on your personal credit history.
9. I don't think I will get approved for a loan to start my business.
This is a common concern, but there is A LOT you can do with no money. And be sure to call any small business associations your state has as well as the SBA (Small Business Administration). No credit or bad credit is not an end all be all. You can be approved for a loan since the SBA will be "backing" the loan for you. Therefore, banks/lenders will work with you more due to this.
10. What can I do if I cannot afford to incorporate as an LLC right now?
The fees are typically not as high as most think. In some states, it can be as low as $70 and a lot say that when you initially file your Articles of Incorporation you have 60 days to file the next document.
I hope this helped clear up some questions for you and as always, leave a comment if you have a question that was not answered in this post!
**The above is for educational and information purposes only and does not constitute a client-consultant relationship. This is not legal advice, always seek guidance from a qualified Business Consultant (hi!), lawyer or accountant.