Step by Step Instructions for Establishing a Sole Proprietorship

Written by  //  February 15, 2013  //  Small Business  //  1 Comment

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The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.” Those individuals that start a limited liability company, however, are not considered a sole proprietor if they elect to treat the LLC as a corporation. The advantage of a sole proprietorship is that it is easy to set up. However, a sole proprietor can also be held personally liable for business debts and losses, with creditors and litigants coming after the owner’s personal assets.

Step 1 — Choose a name. You may not be operating your business formally, at least not initially, but you should establish a business name to identify what you do. Although formally establishing your business at the local, state and federal levels is not a requirement for starting a business, doing so can draw a distinction between your personal and business affairs. Choose a name that is distinctive; visit your state’s business development department or secretary of state office to review names. Select a business name that cannot be confused with an existing business.

Step 2 — Register your business. Your city may require that you obtain a license to conduct your business. Local laws and regulations will dictate whether this is required and what fees, if any, you will have to pay. Your community may treat a work at home business differently from one operated at the store front level, but not always. If you plan to handle food, a separate health department license and review will be necessary.

Step 3 — Establish business accounts. Always keep your business accounts and personal accounts separate. Revenues generated for your business and related expenses should be passed through and recorded by your business account. Intermingling accounts will make it difficult for you to track your business dealings and perhaps make it impossible for you to determine if your business is profitable or not. Check with your bank or credit union to learn what small business options are available to you.

Step 4 — Keep separate records. It is not enough to keep separate business and personal accounts. You also need to track your business accounting separately. Invest in accounting software and set up a file exclusively for your business dealings. When it comes to tax time, you will need to show your self-employment revenue on IRS Schedule C. Arrange to have your quarterly taxes paid on time too. Maintain up-to-date records; work with a bookkeeper if you need assistance.

Step 5 — Establish a business plan. Even if your business is informal, having a business plan on hand can keep you focused on what is important. A business plan starts off with a statement outlining your enterprise’s purpose and goals, offering details on marketing to help you reach your goals. You can show what revenue you expect to earn in your first year, your related costs and what it will take for you to turn a profit. A business plan can also help you borrow money, what you will show to lenders to demonstrate viability.

Considerations

Although establishing a formal business is not necessary, you may want to consult with a business attorney to discuss your options. The liability end of running a business cannot be ignored, especially if you cannot personally sustain possible losses and related debts. By forming an LLC, you can offer a measure of protection that will personally insulate you in the event that you are sued. Your attorney will discuss these options and can help you file the appropriate paperwork to establish an LLC.

If you need to borrow money, consider asking family members and friends first. Sign a contract to show how much was borrowed and at what interest rate, if any, and the terms for repayment. You may also want to offer your lender a stake in the business in exchange for his investment.

Author Information

Frank Roberts writes for Swope, Rodante P.A., a Tampa law firm specializing in cases involving traumatic brain injury, wrongful death, automobile collision, and catastrophic injury.

See AlsoCommercial Financing Options for Small Businesses

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