What is a Sole Proprietorship? Part 3 of 3: Formation

This is the third and final part of three covering the Sole Proprietorship entity.  What follows is a (very) brief discussion of its general formation.


There are generally no state or federal registration requirements for forming a sole proprietorship.  The most important, and sometimes only, step in forming a sole proprietorship is obtaining a business license from your municipal or local governmental authority.  Prior to engaging in any business, however, be sure that you obtain any and all necessary licenses, permits, or exemptions.  For instance, you may need a use permit or exemption if you plan on running your business out of your home as there are often zoning restrictions in residential neighborhoods that limit or prohibit business operations.


If you intend on using a business name that is different from your personal name, then you will likely have to file a “fictitious business name statement” or a “doing business as” with your municipal or local governmental authority, and then publish your “d.b.a.” in the local newspaper for a required period of time.


If you do not hire employees, then your Social Security Number will double as the business’s tax identification number.  If, however, do you hire any employees, you will need to obtain a federal employer identification number (“FEIN”) by filling out and filing IRS Form SS-4, or just doing it online.  As a final matter, because you have no sheild against liability, like you can enjoy with a corporation or LLC, investing in a solid insurance policy (and possibly with umbrella coverage) is critical.


Take Away Thoughts


Sole proprietorships offer an entrepreneur the opportunity to form a business entity quickly, easily, and cheaply.  An entrepreneur must be mindful that in operating as a sole proprietor, however, his or her personal assets will be exposed to the business’s creditors.  The self employment tax also can sting.