Setting Up A Sole Proprietorship
Setting Up A Sole Proprietorship
Chas Rampenthal (Attorney-at-Law) gives expert video advice on: What are the most common mistakes when setting up a sole proprietorship? and more...
What types of licenses and permits are needed to set up a sole proprietorship?
Unlike a corporation, which would require filing with the state and some formalities to start, a sole proprietorship is started right away. A sole proprietorship is started as soon as you say "I'm open for business". However, that doesn't mean that you don't need any requirements or any formalities to start a sole proprietorship. There are licenses and permits that you might need to start a sole proprietorship, depending on your business. For instance, if you're a sole proprietorship and you're engaging in any sort of real estate activities, you might need a real estate broker's license or if you're a mortgage broker, you would need a mortgage broker license if your state or county or city requires one.
Do I have to register the sole proprietorship's business name?
That depends and the one thing it depends on is what name you are using. Anytime an individual uses their own name in a business, for instance my name is Charles Rampenthal even though I go by Chas and I went by Chaz Rampenthal Plumbing or Chaz Rampenthal Home Building, I would never need to actually register my business because I am working under my own name. Even if I had my father who happens to be a contractor, if he wanted to call it Rampenthal and Sons Construction, that would be usually acceptable. Now, if you do want to operate a business underneath a name or under a name that is not your own name, for instance if we wanted to do A-1 Best Construction Services, then, if you don't have a corporation that has that name, and filed under that name, you would need to file what is called a dba or a “doing business as” with, it depends, usually with your county, but in some states it can be statewide and in some states it can even be city wide that you need to file one of those. DBA also can be known as “assumed name” or a “trade name” or a “fictitious business name”. It just depends on the jurisdiction you are in.
Do I have to register my sole proprietorship?
It's not that you neccessarily have to register any sole proprietorship, but if you have a separate employer identification number, you in a sense have kind of registered it with the federal government. Additionally, you can get state tax-payer ID numbers as well, and what that allows your sole proprietorship to do is to kind of file its own return. Now, even though what you're really doing is - you're not really filing a separate income for it, you're accounting for that business income on schedule C on your own personal tax return. Now, what getting a federal or state tax ID number can allow you to do, especially the federal one, it allows you to open up a bank account, and it can allow you to do things like hire employees, some things that you might not be able to do, even as a sole proprietorship if you don't have it.
Can I change my business form from a sole proprietorship to another form later?
Generally, yes. If you have a sole proprietorship, you can take that, and you can move that into a corporation; a LLC or pretty much any legally recognized business entity. Most states, whenever you're forming a corporation, or an LLC, they'll ask you or they'll need to know when your business started. And a lot of times it could have started 1 year ago, or 5 years ago. That's one way of taking the pros and cons of whether or not you should form one. If you determine initially that all you want is a sole proprietorship, but then you see your business growing and growing and growing, there's going to be a point in time where you say, "Well, I need this, I need limited liability protection. I need the ability to do my taxes differently, or to keep money in the business, or to grow it, or to bring in investors." At that point in time, it's usually very easy. Almost as easy as starting a brand new business corporation, to convert an existing sole proprietorship. ??
What are the most common mistakes when setting up a sole proprietorship?
Common mistakes made when setting up a sole proprietorship are, number one, they don't get an assumed name for the sole proprietorship when they need one. I wouldn't call it a monumental or a horrific mistake but it's definitely a mistake that you would rather not make. If you're going to be operating under an assumed name or name other than your own, you should register it with the county, state or with the city, as required by your jurisdiction . Additionally, I think one of the biggest mistakes when setting up a sole proprietorship is not keeping funds separate. Having separate bank account for the sole proprietorship, keeping separate receipts, even having a separate checking account is crucial when you're setting up a sole proprietorship. It allows you to take a look at your sole proprietorship's profits and losses separate from the rest of your family and it really kind of helps you out at tax time at the very end.