How To Start Sole Proprietorship (Step-By-Step Guide)

In the business industry, there are several types of businesses that thrive. 

These types can be in partnerships, corporations, limited liability companies or LLC, etc. Well, a sole proprietorship is also one of the types in business. 

This one is a common form and most straightforward to start the business without requiring anyone. 

The type covers most of the small businesses. And it’s the least expensive way for starting the business with complete ease.

 Even the IRS reported in 2016, that under Schedule C of Form 1040 more than 25.7 Million taxes were paid by sole properties. 

As for 2021, the number increased and so the people are looking for more ways to start their business. If you are the one, here is the step by step guide for your help. 

step by step guide to start sole proprietorship

What Do You Should Know About Sole Proprietorship? 

More than 73% of businesses in the US are operated as well as owned by sole properties or sole traders. 

Lots of entrepreneurship prefer this type as it gives complete ownership over the decisions regarding the business. Also, it means all the profit and revenue directly belongs to the owner. 

Well, A sole proprietorship can be started by an individual, unlike an LLC or corporation where you need a set of members to qualify for starting the company. 

Also, you don’t have to be registered with the state. A sole proprietorship is considered the easiest type. You need to acquire the licenses as well as legal permits to operate.

Here, the sole proprietorship is personally responsible for lawsuits,  debts, and taxes for the company. 

pros of sole proprietorship

Is It For You?

The sole proprietorship is one of the basic forms of business. Also to those people who are looking for the option where you can start much faster and without any hiring, you can choose this one. 

Also if your business is related to this type if your firm carries these features: 

  • Have requirements in  lower compliance
  • Fewer requirements in capital 
  • Low rates in income taxes
  • Unosganizd strcutures 
  • Need independent operations 
  • Have fewer risks at the operational level 

However if to make sure that you are choosing the option for a solid reason, make sure you know about these reasons too : 

  • When you don’t want to take all the liability risks on your own or want your personal life to get affected by the whole business, it’s better to stay away from this. 
  • Sole proprietorship comes with huge risks that include credit risk and personal bankruptcy. If you are not sure about this, it’s better to get another business structure. 
  • When you choose LLC and corporation formation, you get the tax benefits that help your business for saving your money on the taxes. But with sole traders, you don’t get these benefits. 
  • There are lots of business capital involved, and if you don’t have the access. then proprietorship not in your business option. 
  • The business has everything in your control which means whatever results happen, it will be on you to deal with.

The investment opportunities are limited. And it takes much more effort in raising funds. The shareholders and investors are not too keen as it includes higher risks. 

What Are The Types You Can Start With?

A sole proprietorship is also divided into different types. To choose the business, the type is required to select. As different types have the legal requirement and functions to begin.

ideal examples of sole proprietorship

To know better, here are the types you should consider. 

Independent Contractor 

Well, with this one the independent contractor is a self-employed sole proprietorship.  This means you can take a project with clients on a contract basis. 

The person has the freedom to choose whichever clients they want to work with. But it also requires following the processes that the clients are needed to start with. 


The owners of different franchises or franchisees are considered as sole proprietorship.  The franchise gets help from the person for guidance,  business model, brand, etc. 

In exchange for this, the person gets the royalty paid. 

Business Owners 

The business owners are also eligible to consider as a sole proprietorship. This is another type but different from independent contractors in several ways. 

Here the autonomy of how the work will be completed for a client. And the working becomes more complex as it requires employees or intellectual property. 

cons of sole proprietorship

What Are The  Sole Proprietorship Features?

The sole proprietorship characters include: 

features of sole proprietorship

When you choose proprietorship, you have one man ownership.  

Also, there is no distinction made between the properties and the concern. Here both are considered the same. 

In a proprietorship, you are the one who is going to handle the management and ownership both. 

Unlike other business structures, here the sole owner has the responsibility in case something goes wrong. It means if anything happens and loss occurs, you will be responsible for the whole thing. 

This also leads to the next important feature, if the sole proprietorship is the one who is going to face loss. It also means that the profit will be there too.

You will have all the profits on your own, unlike a partnership where the profits get divided between partners. 

There are fewer formalities which include fewer formalities regarding the legal, licenses, and permits. This saves much more time and effort. 

Step By Step: How To Start With Sole Proprietorship?

A sole proprietorship is free and easy to start.  There are lots of people who use this for turning their side hustle into something lucrative and much serious.

There are a variety of businesses that are considered to operate under this type of business.  Well to start with one, you are going to need a step by step guide to make sure you are following the right way to start the business. 

However, sole proprietorship also comes with huge risks. When you choose this,   there are lots of personal liabilities, perceived for the lack of professionalism, difficulty in raising capital, etc. 

Well if you are sure about this even after considering all the pros and cons, here are the steps, to begin with. 

Step 1: Ensure The Type Of Business Structure  Is Ideal For You 

It’s important to understand the business structure plays a huge role in how your rest of the work will perform. 

What type of business structure you choose, will influence your operations, taxes,  personal assets, and risks. 

You can choose different structures depending on the requirements of your business. Some of the other types you get here are:

  • Partnerships
  • Limited Partnerships 
  • Corporations
  • Non Profit Organization 
  • Limited Liability Company or LLC
  • Series LLC
  • S Corporation 
  • Benefit Corporation 
  • L3C
  • LLP

Step 2: Talk To Your Small Business Development Center 

When you are sure about what you are going to choose. Make sure you visit the nearest SBDC or small business development centers. 

The SBDC helps in understanding the steps that you need to take for starting your business. Also, they make sure that you are following all the steps and rules that your state has.

The mission of SBDC is to help small businesses and promote their growth,  productivity,  innovation, revenue, etc. 

They also provide the knowledge, expertise, and education that small businesses might be missing. 

Step 3:  Choose Your Business Name 

Next includes choosing the name that you want your business to be known for.  However, make sure you are doing your research to make sure your name is not taken or has already been established by someone. 

Well to name your business, you can follow these tips for choosing the impressive and effective name that suits the business. 

Follow The  Rule Of K.I.S.S

The mnemonic stands for Keep It Simple Stupid or K.I.S.S 

This rule is applied to several decisions taking and procedures related to planning. You can consider using the rule of finding the right name for your business name. 

Choose the name that can be easy to spell and short. Don’t make it too twisty or hard to find especially for the website. 

Choose one to two syllabus. You can consider inspiration from names of some famous brands such as Twitter,  Nike,  Apple, Google, Facebook, or eBay.

Add No Puns 

People don’t consider puns in someone’s business name funny. Also, it keeps them less integrated into sharing to others as it’s too long or hard to remember. 

Don’t consider names that are too wordy or puns. Keep it simple, clear, and easy to remember. 

Keep The Cliches Away 

This category is similar to the puns family.  This means not to add something which is way too obvious. For example, if you are running a pet store, do not name it Furry Friends or candy stores as Sweet Store. 

These names are too common and the chances of people having the stores on this name are too obvious. Choose something that is different and stands apart from others but in good ways. 

Add The Bit Of Spin 

To make it interesting even though it sounds silly, adding a bit of spin can help you in finding good names for your small business proprietorship. 

It can help you in finding a clear picture of your market and targeted audience. For example, if your store name is “ Furry Friends”, You can make this cliche name interesting by adding spin and changing it to Family Of Fur. 

Pro Tip: Consider taking help from USPTO or the United States patent and trademark office. They will help in knocking if the business name has already a trademark or not. 

Step 4:  Register The Doing Business As 

When you choose sole proprietorship, your personal name is the legal name of your business. 

However, if you want to operate under something different, you can register it as a fictitious name. Or you can sign as doing business as also known as DBA. 

Well, in different cases, you might need to separate the funds based on personal and for the business. 

And to open a bank account or credit card for the business, you will need the DBA.  Also, you will be required to follow the rules for the registration. 

When you have the DBA, it also ensures that no one else is doing the business under the same name. 

Step 5:  Purchase Your Domain 

When you get the perfect name that you want for your business and register it by following all procedures. Or, it’s important for you to get the domain for your business. 

Not just for starting the website but also to make sure your business is easy to find. 

However it’s not important to start the website right away, but make sure you get the domain purchase as early as possible. 

The name you should choose matches the name you have for the business. 

To make sure you are following the right steps, here are some of the important ones highlighted: 

Start Early And Choose The Suitable One 

Start early during your small business proprietorship process.  It can also influence the rest of the online presence you have for the business.  

Make sure you choose the name that fits perfectly to the niche you work and services provide. 

Remember The Checklist For Domain Name 

There is a basic universal rule that you need to follow when you are choosing your domain name. Not just it supports the brand you want to create but also the perfect domain should be 

  • SEO friendly 
  • Short 
  • Easy to spell 
  • Unique 
  • Memorable 
  • Relevant 

However, it might be hard to find the perfect domain that ticks all the boxes. But you can use this checklist to find the name that has at least some of the boxes. 

Use right Tools 

There are different tools that you can use for the individual domain name.  You can use the tools to make sure you are getting the list you want and get the domain registered much in less time. 

It will save you from all the hassle and time waste. 

Register Fast 

The game is to get your domain registration when you have the name you were looking for.  If you are not sure, make sure to get the name registered first. 

The domains are affordable, so you can get more names on your list to use for future use. 

Step 7: Check The Permits And Licenses 

Lots of businesses face issues and financial problems due to not following the rules and regulations. Also having the permits and licenses can help you in making your small business sole proprietorship better. 

It’s important to follow the federal licenses and permits according to state and their rules to know. 

However, this might include some of the basics, such as : 

  • A zoning permit for operating the business from home. 
  • Federal licenses for transporting animals 
  • Health department permit for serving food or preparing it 
  • The certification exam for financial advisers 
  • Registration with the tax authority of the state

Make sure you complete all the legal paperwork done and find if there are any licenses or permits that might be skipped. 

Pro Tip: Don’t consider skipping. The fine of not filling this paperwork is much bigger than the fees you will pay for the whole process. 

Step 8: Get Your EIN 

If you are not considering hiring someone and plan to work alone the rest of the time,  then you can skip the EIN process. 

Also, you can be filing taxes by using your social security number. 

However, if you have some requirements or you believe that you might need employment in the future, EIN is an important point to follow. 

EIN means Employee Identification Number. In the US, every business requires an EIN. This is needed by the IRS for identifying the tax purposes of a business in faster and easier ways. 

EIN is a set of unique nine numbers that are issued by the federal government. It’s quite similar to a social security number. 

The EIN is needed for starting the bank account, applying for licenses, and filing the tax returns. 

Step 9: Get Your Business Bank  Account

When you are starting with your sole proprietorship business, make sure that you have a separate personal and business account. Especially in case you are getting audited. 

When you have a business account, it ensures you a certain level of protection to funds. You can pay your customers with crest cards and do the check payable payments to the business. 

With this, you can build a good credit history too. 

It is advisable to have a good credit history before you start the business.  When you have a credit score, you can use your credit card and it will help you in starting your business where the cash flow is low. 

However, make sure you are controlling the expenses so it doesn’t get too overwhelming for you to pay the actual price and the interest. 

Step 10:  Get The Insurance For You 

The biggest liability you get when you start with a sole proprietorship business is everything is on you. It includes all the risks and every loss that will happen. Not just it affects the business but your personal savings too. 

To make sure you are ready for future problems, it’s advisable to get the insurance done. It can help you in providing coverage for property, auto insurance, health, etc.

liabilities insurance does sole proprietorship needs

Also, the insurance can be expensive but it will protect you from future losses. 

Step 11: Pay The Taxes 

Like sole proprietorship, there are some important taxes you will need to pay on time. Not just it is required to keep your business flow better but also to avoid any kind of hassle in future. 

You can file your sole proprietorship income taxes, use the Scheduled C on form 1040, now add the income or loss depending on the record you have. 

It’s important to remember  that you are self-employed which means the paychecks are not withholding properly when the time you paid 

You can use the quarterly estimated tax payments. Use different covers or receive funds for shortage as well as coverage tax seasons.

Also, keep your money from each paycheck to get those quarterly and annual expenses covered. 

Make sure you have all the required information about how to file the texas and the dates etc ready. 

Frequently Asked Questions ( FAQs)

Can a sole proprietorship business hire employees?

Sole proprietorship businesses can hire employees but it is important to follow the state and legal rules. Also, the business will need to have EIN or Employee Identification Number for tax purposes. 

Does Sole proprietorship have a salary?

Well, the sole proprietorship can’t receive the salary. This means you can’t do the tax reduction either. The pay depends on the fees that you collect from the services and products you provide to the customers. 

What are the advantages of a sole proprietorship?

When you choose the sole proprietorship business structure it gives you less need for paperwork for starting the business.  You also don’t need too many fees,  straightforward banking,  simplified business ownership, etc. 

Similar Posts:

Was this article helpful?