The simplest and easiest way to start a business is to create a Proprietorship. A Sole Proprietorship is also known as a Doing Business As, (DBA), and also known as a Fictitious Business Name. However, most people refer to this type of business, owned by an individual, or by several individuals, as a Sole Proprietorship. The Tax identification number for a Sole Trader is the Social Security Number of the business owner.
Sole Proprietorships have advantages and disadvantages. The advantage of a Sole Trader is that it is quick and easy and inexpensive to create. There is no annual fee to the state or the federal government to operate a Proprietorship and there is also no separate tax return. Unlike a Corporation or an LLC, both of which have to file separate tax returns, any net income from the business is reported on the Schedule C of the Individual IRS 1040 Income Tax Return for the tax payer. Registering your own Sole Proprietorship also helps you reserve the name of your business. When you operate your business as a Sole Trader, you do not need to select an Agent for Service of Process. The owner of the Sole Proprietorship is registered in the County where your company does business, and any person can consult the County’s records in order to discover the identity of and contact the owner of the business.
The disadvantage of a Sole Proprietorship is that it does not provide any asset protection for the business owner in the event of a lawsuit or bankruptcy of the business.
Advantages of a Sole Proprietorship
- Owners can establish a proprietorship instantly, easily and inexpensively.
- Sole proprietorships carry little, if any, ongoing formalities.
- A sole trader need not pay unemployment tax on himself or herself (although he or she must pay unemployment tax on employees).
- Owners may freely mix business or personal assets.
Disadvantages of a Sole Proprietorship
- Proprietorship does not provide any asset protection for the business owner in the event of a lawsuit or bankruptcy of the business.
- Owners cannot raise capital by selling an interest in the business.
- Proprietorships rarely survive the death or incapacity of their owners and so do not retain value.
Many businesses start out as a Sole Trader because it is quick and easy, and later, after the business is successful and established, the Proprietorship can be converted into a Corporation or an LLC. If you need to reserve a business name and start your business quickly, and if you’re not too concerned about potential creditors, lawsuits or bankruptcy, you should consider creating a Sole Proprietorship.