Operating as a sole proprietor is the easiest route to starting your own business compared with forming another type of business structure, like a limited liability company (LLC). Sole proprietorships are popular among solo business owners, consultants, and freelancers. This business structure lets them conduct business under their own names because they don’t need to create a separate business or trade name.
Ready to turn your product or service into a business? Read on to learn the basics of a sole proprietorship, its advantages and disadvantages over other business structures, how to set up your business, and what you need to know to operate your business as a sole proprietor.
What Is a Sole Proprietorship Business?
A sole proprietorship is an unincorporated business with just one owner.
A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered a sole proprietor if you perform business activities but have not registered as any other type of business, like an LLC or a C Corp.
Sole proprietorships are not a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. Therefore, you can be held personally liable for your business debts and obligations.
Sole proprietorships can be a good choice for consultants, businesses with very low risk, and those who want to test their business first before committing to the time and costs of forming a more formal business structure.
What Are the Pros and Cons of Being a Sole Proprietor?
Before deciding on your business structure, it’s crucial to consider your business goals, the nature of the industry, and your personal preferences. Consulting with a legal or financial professional, or an adviser at your local SBDC, can provide valuable insights tailored to your company description.
Here’s a look at some of the advantages and disadvantages of choosing to become a sole proprietorship.
- Ease of formation: With a sole proprietorship, you need to register the business with the state only if you are using a name other than your legal name (“real and true” name). However, depending on the kind of business you operate, you may be required to obtain a license or permit. With a sole proprietorship, you can get your business up and running quickly and with less hassle and cost.
- Direct taxation: As a sole proprietor, you report profits and losses on your personal tax return (pass-through taxation), which simplifies tax matters. There is no separate business income tax. Also, you are not required to obtain an employer identification number (EIN) from the IRS unless you will have employees. You can use your own Social Security number to file and pay taxes.
- Low operating costs: Operating costs are generally lower compared with more complex business structures, as there are fewer regulatory and compliance requirements. The fees for establishing the business are also lower.
- Full control: As the sole owner, you have complete control over decision-making and the direction of the business. Sole proprietors also have the flexibility to adapt quickly to changing market conditions or business strategies without the need for extensive consultations.
- Ability to grow: Many entrepreneurs and small business owners begin as sole proprietorships. As they outgrow this business structure, they can register to become a limited liability entity, such as an LLC or a corporation.
- Unlimited liability: Because a sole proprietorship is not a separate business entity, any business liability can become your own. For example, business creditors could seize your personal assets. Because a sole proprietorship offers no liability protection, you could go personally bankrupt if your business doesn’t succeed or faces unexpected challenges.
- Limited resources: Sole proprietors may face challenges in raising capital as they rely mainly on personal savings or loans. Obtaining financing can also be a hurdle with a sole proprietorship. Banks and potential investors prefer to work with businesses that have a proven financial track record, and as an individual starting out, you appear as higher risk.
- Lack of business continuity: The business is closely tied to the owner. That means illness, death, or other unforeseen circumstances could disrupt its continuity.
Sole Proprietorship vs. LLC: How to Choose?
You may be wondering if it would be better to create a sole proprietorship or an LLC. A sole proprietorship is usually a good fit for small businesses with low risk, low profits, and a small customer or client base.
An LLC, on the other hand, may be the better fit if your business is associated with some risks, if there’s the possibility of raking in large profits, if you have a large customer base, if you have employees, or if you’re in a position where you could benefit from certain tax structures.
If you’re still unsure, you may want to consult with an Oregon SBDC adviser who can provide guidance based on your specific circumstances and business plan.
How Do You Set Up a Sole Proprietorship in Oregon?
In Oregon, you can start a sole proprietorship without filing any paperwork with the state government, unless you choose an assumed business name, need licenses and permits to operate, or will be hiring employees. Review the steps below to take the necessary actions.
1. Choose a business name.
In Oregon, a sole proprietor may use their own “real and true” name or a trade name. If you plan to use a business name or a trade name, state law requires that the name be distinguishable from other company names on record. You also want to choose a name that is not too similar to another registered business because of common and federal law trademark protections.
To make sure your business name is available, run a search in the following government databases:
2. File an assumed business name.
If you want to use a business name different from your legal name, Oregon requires you to register an assumed business name with the Secretary of State’s Office. This is a mandatory requirement in Oregon.
3. Obtain licenses, permits, and zoning clearance.
Your small business may need licenses depending on its business activities. Oregon provides a directory of every profession and occupation requiring a license. You can obtain this information by visiting the Business Xpress License Directory.
In addition, local regulations—including licenses, building permits, and zoning clearances—may apply to your small business. You will need to check with your city and county governments for more information.
4. Obtain an EIN and a BIN if hiring employees.
Sole proprietors who want to have employees need to obtain an employer identification number (EIN), and a business identification number (BIN).
The EIN is a number issued by the IRS for tax reporting purposes. All businesses with employees must report wages to the IRS using their EIN. You can register for an EIN through the IRS website. (Sole proprietors with no employees don’t have to have an EIN. Instead, you can use your Social Security number to file and pay taxes.)
The BIN is your state payroll tax identification number; visit the Oregon Department of Revenue to apply for one. (Note: Don’t get a BIN unless you have employees or will have them very soon.)
5. Prepare to pay taxes as a sole proprietor.
To file taxes as a sole proprietor, you need to complete a Schedule C to report your business’s profits and losses when you complete your Form 1040 for personal income taxes. The amount you owe will be based on the combined income reported on these forms.
Making the Right Choice for Your Small Business
A sole proprietorship is a straightforward way to start your own business. In some situations, it does not require registering with the state or even obtaining an EIN with the IRS. However, keep in mind the risks involved and the personal liability you can face.
But the bottom line is that, if you operate a low-risk business, being a sole proprietor presents a quick, easy, and low-cost way to get your business up and running. For professional guidance specific to your situation, contact an attorney or CPA.
At the Oregon Small Business Development Center Network, we help build Oregon’s best businesses. Our 20 regional Centers and Global Trade Center assist small businesses throughout Oregon with advising, classes, and access to the resources they need to be successful.
Each Center has the backing of our statewide support network. This helps small businesses access the proper assistance wherever they are in Oregon. Connect with your local SBDC at OregonSBDC.org.
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