Gaizer.com Tips for Business Start-ups

A sole proprietorship is the simplest type of business structure to establish. You are considered a sole proprietor just by doing business without partners. For example, if you do paid carpentry work in your spare time, you are a sole proprietor. You should only consider a sole proprietorship if you want to pay taxes from your business earnings on your personal income tax return and you are not concerned about personal liability. Otherwise, if you are sued or you cannot pay your business debts, your house and wages could be at risk.

As a sole proprietor, you must pay taxes from your company’s earnings on your personal income tax return. More importantly, you are personally liable for all business-related obligations, such as debts and court judgments.

Example One:

You are the owner of a small store in SoHo selling designer clothes. You experience a sudden spike in sales and order $25,000 worth of new merchandise. Unfortunately, demand drops and you cannot pay your supplier. In this case, you are personally liable for repayment of the debt. Not only are your business assets at risk, but also your personal assets, such as your house or your car.

Example Two:

You own a sandwich shop in the East Village. A customer is injured in your establishment. If the business is sued and the court rules against you, then you may be required to liquidate the business as well as be forced into personal bankruptcy.

How to Form a Sole Proprietorship

Because you are required to file little or no paperwork, it is easy to establish your business as a sole proprietorship. The simple act of launching a business without partners will make your company a sole proprietorship. Nevertheless, you will still have to get all of the necessary licenses and permits prior to starting your business. If you are selling to clients, you will need a sales tax authorization. You will also need an employer identification number (EIN) from the IRS. (If you plan to hire employees, you don’t want to use your Social Security Number!) In addition, many sole proprietors operate as a DBA, “doing business as.” For example, “John Smith doing business as Johnny’s Restaurant.”