How to start a business as a Sole Proprietorship
Starting a side hustle is exciting and fun but also involves research on how to get started. This post will explain the pros and cons of starting your business as a sole proprietorship and provide the essential steps you need to take. When I started my side hustle six years ago, I wasn't aware of licenses and permits to get properly started. I don't want this to happen to you when starting your side hustle.
Sole Proprietorship Definition:
A sole proprietorship is known as one of the simplest forms to start and operate a business. Choosing this business structure allows you to operate under your name or a fictitious name, such as The Social Wisdom. Running your business under a fictitious name is known as a dba "doing business as." The dba name is the name you are giving your business; it does not protect your name or create a legal entity.
You don't have to register with the state, but you must obtain licenses and permits to operate legally. As a sole proprietorship, you will be liable for any debts or lawsuits with your personal assets. Income and losses will be taxed on your personal income tax returns.
Many business owners choose the sole proprietorship because it is easy to set up and is cost-effective. You will have full ownership of decisions and revenue from the business.
1. Decide on the type of business
Before you start, you need to think about what type of business you want to operate. Many entrepreneurs choose to use sole proprietorship to start a side hustle and turn it into a lucrative business. I compiled a few examples of sole proprietorships to get you started:
Sole Proprietorship examples:
Photographer
Writer
Content Creator
Influencer
Housekeeper
Nanny
Digital Marketer
Wedding / Event Planner
Virtual Assistant
Landscaper
Graphic Designer
Tutoring
Catering
2. Different business structures
Sole Proprietor
The simplest form to operate a business. You own the company and are responsible for debts and liabilities.
Partnership
Similar to the sole proprietorship, a partnership is easy to set up and to get started. In a partnership, both partners own and control the company. The most significant disadvantage is that the partners are personally responsible for debts and losses. If the business runs into any problems, the partner's assets may be at risk. If the partnership was a limited partnership, that would not be the case. In a limited partnership, the partners are not liable with their personal assets.
LLC
LLC, which stands for Limited liability company, is a business form where the owner is not personally liable for debts. When you decide to form an LLC it becomes its own legal entity that differs from the owners. This allows the LLC to enter into contracts and own assets. If the LLC cannot pay its debts, the creditors usually can only go after the assets the LLC owns. Forming an LLC protects the personal assets of the owners. There are a few scenarios where the owner can be held responsible.
Corporation
When you form a corporation, the owners are not personally liable for debts. There are different corporations you can create, for example, a S Corp or C Corp. The main differences between the corporations are the way you pay taxes. With a C Corp you would pay corporate tax, and with an S Corp you would pay personal taxes.
3. What are the Sole Proprietorship advantages and disadvantages?
Sole Proprietorship Pros
Easy to set up (little to no formalities needed)
Full ownership of the decision-making process
Free to set up (other fees may apply when filling for certain permits/licenses)
Suitable for owners who want to test out their business idea before forming an LLC
Sole Proprietorship Cons
Liable with personal assets
Business bankruptcy means personal bankruptcy
More difficult to raise capital because you can't sell stock
Banks are hesitant to lend money
Seen as less professional
4. Choose a name and obtain required licenses/permits
After you decide what entity to form and what business to start, you need to think about the name. You can either operate under your own name, or create a fictitious name.
Consider filling a trademark. You can visit the United States Patent and Trademark Office to see if your name is available and to file for a trademark.
5. Buy a domain
After you choose a name, purchase a domain. There are a few places where you can buy a domain. I purchased my domains on godaddy.com. You want to choose a simple domain name that is easy to remember and write. Ideally, it should be the same as your business.
6. Obtain required licenses
Before you can get started, make sure to obtain a business license, even if you start as a sole proprietor. Don't skip on getting a business license; fines are high! Each city has its regulations and places where you can obtain a business license. I am located in Los Angeles and got my business license in the city hall.
7. Permits
Additionally, to your business license, you might be required to obtain permits such as a sellers permit or zoning permit. A sellers permit allows you to sell tangible items where you would collect sales tax. A zoning permit might be required when starting a business from home.
Inform yourself before you get started to not run into any difficulties. You can check out federal licenses and permits here and state licenses and permits here.
8. Get an EIN Employee Identification Number
If you decide to operate your business on your own as a sole proprietor, you don't need to acquire an EIN because you can file your taxes under your social security number. If you decide to hire an employee, you need to get an employee identification number.
9. Open a bank account
It is essential to separate your personal and business assets. Not only to keep an overview of spendings but also in case you get audited. As a sole proprietor, it is not required to set up a business bank account unless you conduct business as a DBA. I recommend opening a business account to be on the safe side and separate personal and business assets.
Before you can open a business bank account, you need to make sure you have the required paperwork. An EIN or social security number is required; additionally, you need copies and your business documentation.
10. Pay taxes
As a sole proprietor, you have to pay income taxes on all income your business nets. You can use your business losses to offset other income sources, such as your salary from your day job. It is crucial not to step into the hobby business area with the IRS. Meaning you must prove that your business is not just a hobby to lower your taxes. When your business grows and becomes more profitable, you should think about changing from sole proprietorship to, for example, a corporation.
Also, as a sole proprietor, you are considered self-employed, which means your paychecks won't have any withholdings taken out. Because you have to pay estimated tax payments, you should start setting money aside.
Starting a business is fun and exciting, but it should be started on a solid foundation. Don't start a business without doing the proper research first.
