Everything You Should Know About Setting Up a Sole Proprietorship - LLC.org

If you want to start your own business, you should consider a sole proprietorship. It’s easier to start than other types of businesses and you have complete control. Plus, there isn’t a lot of regulation paperwork or heavy accounting to handle.
We’ve created a guide to explore this type of business structure and explain how to start a sole proprietorship.
A sole proprietorship is an unincorporated business operating by one person. It is not a separate legal entity. However, that doesn’t limit you in the type of business you operate or whether you can bring on employees. It does mean you have a different set of rules and regulations you must follow to maintain government compliance.
Most of these rules relate to taxes but can also relate to safety, local ordinances, and other types of regulations.
There are five basic types of sole proprietorships and they can be a part of any industry. The thing that makes them different from other types of businesses, like limited liability companies, is that most do all the work themselves with no permanent employees.
A common element in most of these types, with the exception of franchisers, is that sole proprietors are often gig workers. That means they work on individual projects rather than a long-standing job. Once the project or event is done, they move on to the next gig.
Some examples of this include construction work, farm crop harvesting, musicians, event coordinators, graphic artists, or copywriters.
Below are the five types of sole proprietors. Some of these categories may also overlap and these types of business owners can work in several ways.
These are people who started a company working in a specific field. It can be someone who set up a handyman services company or a food truck. They have all the licensing and certifications to do the work and own the company.
These are people who take on projects individually, although they may work regularly for a company. Work is done based on time, ability, and project interest. This can be in any field but tends to be used more in professional creative fields like graphic or website design.
Workers that go to work as independent contractors are not officially employed by a company so they are responsible for their own taxes and reporting to the IRS. They also typically aren’t covered by the company’s liability insurance even if they are injured at a worksite.
Those that tend to use this category are musicians, servers, and other event workers.
Subcontractors are hired under the umbrella of contractors for a job. A subcontractor may be covered by the general contractor’s liability and could have taxes taken out of his pay by the general contractor.
In some cases where the subcontractor has employees or independent contractors under him or her, that sole proprietor is given one check by the general contractor and is responsible for distributing pay among his or her workers.
Construction is one industry where this is highly used.
Franchisers are those who bought into a known brand to start their independent business. Many of these are work-from-home jobs like selling Norwex, Mary Kay cosmetics, or natural supplements.
Those who should form a sole proprietorship are people who want to run their own business with no or few others involved, want to limit startup expenses, avoid complicated governmental taxation and detailed regulations, and aren’t planning a major expansion anytime soon.
Sole proprietorship owners often have full-time jobs and run their business entity as a side business at first. Those who maintain a permanent job while starting their sole prop business tend to do well at their side business since they can take longer to research and move more slowly into growth.
There are three distinct advantages to starting a sole proprietorship. They include the following:
A sole prop business allows you to keep all the money you earn outside of paying for your expenses so you don’t need detailed spending reports or tracking. Profits are reported on your personal income taxes, specifically on a Schedule C, so you don’t need complicated forms during tax time. The business itself does not file an income tax return. You can choose to pay estimated taxes quarterly if it’s easier.
You do need to maintain records of expenses for tax write-offs.
Sole prop businesses typically have a sole owner. You won’t need to go through all the hassle of hiring and firing. You don’t need an employee handbook and won’t deal with the Department of Labor, OSHA, or any other employee regulatory agency.
Starting a sole prop business is a great way to give your new business idea a test run on the marketplace to see if there is genuine interest. You can keep your regular job while you invest time into your sole prop business so the financial risk is limited. You can grow your sole prop at a slow pace and move into it full-time when you are comfortable with its success.
Sole prop businesses have some disadvantages that increase financial and liability risk. These should be considered carefully.
A sole prop business and your own name are synonymous in terms of personal liability. That means someone can legally sue you personally for work, injury, or a contract dispute. That could put your financial future in jeopardy and also put your personal assets like your home and vehicles at risk.
You are also personally responsible for all of the business’s debts.
Sole prop businesses are organically limited because you don’t have permanent employees you can depend on. That means you can’t take on a big construction job or a huge event. This also means you could miss out on some moneymaking opportunities.
Each state sets up its own rules for starting a sole proprietorship so the first thing you must do is research the rules for your state. You must also spend some time looking at regulations for your local municipality as it can have more stringent rules than the state.
Local governments also control things like zoning for home business