The process of registering a business as a sole proprietorship doesn’t have to be complicated. In fact, it can be done in just seven simple steps, from choosing a business name and registering your DBA with your state to applying for an EIN number and any required licensing.
Here’s how to start a sole proprietorship in seven steps:
Step 1. Decide on a Business Name
Coming up with a business name can be exciting―it is a representation of you and the product or service you are providing. People will associate you with this name, so it’s important it represents your business well.
When you start a sole proprietorship, your legal name is, by default, your business name, so it simplifies the process. Meanwhile, you have the option to create a separate business name, otherwise referred to as doing business as (DBA).
Step 2. Register Your Business DBA Name
If you opt to use your full legal name for your business, no further action is required. You may operate without registering and using your Social Security number for tax purposes.
However, many sole proprietors use a trade name for marketing purposes or to keep their personal identities separate from their business. If you plan to use any name other than your personal name, you’ll register a DBA name. For instance, Jane Smith doing business as “The Wedding Seamstress.” You are still operating as a sole proprietor but choosing to run your business under your business name. Make sure that no other business has your name by doing a search within your jurisdiction.
Requirements to file a DBA vary from state to state, and you may need to file at either the state or local level. Check with the office of the secretary of state or county clerk’s office where your business is located.
Step 3. Buy and Register a Domain Name
A great way to market your business is to create a website, which is considered your online home base. This is your greatest digital asset―one where customers can learn about your products or services.
Now that you have the perfect name for your business, checked to make sure no other business has the same name and filed for your DBA, you’re ready to buy your domain name.
The domain name is a unique URL address used to direct traffic to a specific website. In this case, the domain name will be specific to your business name or catchphrase. Depending on which domain registrar you go with, you will need to do a name search to make sure it’s available. It’s best to keep the domain name as close to your business name as possible.
Step 4. Apply For An EIN
After you file for a DBA, you can also file for an employer identification number (EIN) on the IRS website. The EIN identifies your business for tax purposes. If you file for an EIN online, you will receive an EIN immediately after the application is completed.
The IRS doesn’t require sole proprietors to have an EIN unless they have employees or pay excise taxes. You can use your Social Security number instead. However, you will need an EIN if you hire employees and you may be asked to provide one to open a business bank account.
Step 5. Obtain Business License and Permits
Each state has different licensing requirements for specific industries and professions. A few industries need federal licenses or permits. According to your business type, you may need to register for an operational license or a permit to operate. Depending on the type of business, it is common to need several licenses and permits to operate.
In addition, some states require all businesses to have a license, regardless of size or industry. Some cities and counties also require a general business license. You can research license requirements on your state government website and by contacting your city and county administrative offices.
Finally, if you sell goods that are subject to sales tax, you’ll probably need a seller’s permit. This permit is issued by the state and allows you to collect sales tax, which you’ll then remit to the state.
Step 6. Get Business Insurance
Although becoming a sole proprietor has its benefits, there are some disadvantages as well. Unfortunately as a sole proprietor, business liabilities are also personal liabilities. It may be wise to carry small business insurance.
Without coverage, you’re responsible for any out-of-pocket expenses. General liability can help cover costs for property damage, bodily injury and lawsuits. This can help alleviate financial responsibility for any unplanned incidents or accidents.
Step 7. Open a Business Bank Account
It’s not a requirement that you open a business banking account if you are a sole proprietor, but it can be highly beneficial. Having a business bank account helps keep your business finances organized. Identifying business expenses and filing taxes will be much simpler if you keep your business accounts separate from your personal ones.
A business account also allows you to accept credit card payments and establish business credit. In addition, you may eventually want to grow your business―having a business bank account can be an important factor if you want to take out a loan or set up a line of credit.