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I see a lot of information about starting an LLC or other corporation, but very little information about a sole proprietorship. I am a freelance web developer and programmer and right now I am small and I mean SMALL. I want to take advantage of the tax benefits afforded to small businesses and I think that a sole proprietorship is the way to go...

However, I don't know exactly what I have to do to "become" a sole proprietorship. I've seen lots of information on starting an LLC and know where to find the paperwork and all that. But what about a sole proprietorship? are there any forms or registrations I need? I know I need to submit a DBA (doing business as) for my company name, as well as get an EIN, which I have already done... but how do I "officially" become a sole proprietorship company?

And a related question would then be, when does that sole proprietorship begin? I have been doing some freelance work earlier in the year but didn't do it officially through my business because it didn't exist... So when am I supposed to begin to log that income as going through the business, as well as cataloging the expenses required to run my business?

I'm kind of new to this so forgive if these are obvious questions, but thank you kindly in advance for your help!

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2 Answers

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A sole proprietorship is simply the creation of an alias that allows you to legally market goods and services using a 'dba' (doing business as) name. For all intents and purposes (taxes, liability, etc), you are the business and the business is you. See this wikipedia entry for a little more thorough definition.

If you're accepting payment for goods and services as an individual, you're a sole proprietor. If you haven't obtained a business license in the city where you're conducting business, you're doing so 'illegally'.

In the U.S., sole proprietors are governed and regulated by the local city government. Generally, this means you go down to your local city hall and complete a simple application for a business license. They will fill you in on the details and any other things you may need to get started in your particular city (i.e. collecting sales tax). You may be required to file a dba listing in your local paper for several weeks as a public notice that you will be doing business under this name.

All in all, it should cost you less than $100 to get setup. Your city will charge you (usually quarterly) a fee to maintain your business license. This scales with revenue so for a startup the fees are usually very modest.

Once you have a business license (and are a legitimate sole proprietor), you'll want to go to your bank with your license and open a business checking account to keep your personal and business transactions separate. You'll then want to make sure you've consulted a qualified CPA about what you need to do for bookkeeping and taxes - i.e. revenue and expense tracking.

SBA Licenses and Permits is a government site that:

allows you to get a listing of federal, state and local permits, licenses, and registrations you'll need to run a business.

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great overview, Keith! – jane Jul 27 '10 at 18:21
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Good detailed answer. However, I would note that not all states require you to publish an ad in the local paper. – Zuly Gonzalez♦ Jul 28 '10 at 21:16
Thanks Zuly. I've edited my answer to reflect that a published ad may be a requirement. – Keith DeLong Jul 28 '10 at 21:40
wow thanks this is great info. In all my research on this there wasn't one mention of local licensing for a sole proprietorship, only for corporations like llc, etc. I honestly had no idea I needed such permits, I will do this right away... but does this mean I can't deduct any expenses taken before I get those permits? – sonofabit Jul 29 '10 at 4:36
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You should have no problems deducting startup expenses incurred prior to obtaining your business license as a sole proprietorship. These are great questions for a qualified accountant. Find a local CPA who you can ask these kinds of questions. The few dollars spent up front will save you a lot of heartache on the back end. Many CPAs are willing to help startups at very reasonable rates. They know that this is the source of obtaining loyal clients as businesses grow over the years. – Keith DeLong Jul 29 '10 at 15:53
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up vote 1 down vote

Note that sole proprietorship is really easy to set up, but also provides the least protection for your business and the least flexibility, tax-wise.

It's a great place to start your biz (and easy, too), and later as you grow, you can simple start an LLC or Corp and transfer all the sole proprietorship's assets to that new entity.

Here's a quick article I found detailing some of the differences between an SP and an LLC, that might help: http://www.edubook.com/llc-vs-sole-proprietorship/3966/

Good luck---

best Eric

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