3 March 2024
BUSINESS

What is sole proprietorship? How to start?

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A sole proprietorship is a business or organization owned, managed, and controlled by a single person who is solely responsible for all profits or losses. A sole proprietorship is one of the most common types of business, particularly for small businesses at least in their early years. Sole proprietorships are typically a specialized service, such as a hair salon, beauty salon or small retail shop. 

Example 

A Beauty Salon, Barbershop, General Store and Sweet Shop owned and operated by one person.

How to start a sole proprietorship? 

You don’t have to go through any legal process to create this business. If you’re the sole proprietor and you start running your business, you’re automatically a sole proprietor. There’s no need to file any paperwork or file anything at all with the federal, state, or local governments.

1. Business licenses and permits

It’s important to note that depending on where you operate your business and the type of business you operate, you may be required to file for a business license and/or an occupancy license and permit. In some jurisdictions, you may not be able to open your business until you have obtained a business license. Contact your county clerk to learn more about your locality’s requirements. Your county clerk can answer your questions and provide or send you any forms you need.

2. Operating under an assumed name

Your sole proprietorship company will operate under a different name than the owner’s name. Most localities will ask you to file a Do Business As (DBA) name. Filing a DBA name tells local governments and the general public that the company is operating under a “forged” name and who owns the company.

Deciding which name to use can be a tough call. If you’re well-known and respected within your community or industry, using your name can be an effective marketing strategy.

On the other hand, there’s a downside to using your name. If the company fails or runs into legal or financial difficulties, it’ll have your name attached. If you attempt to start another company, people may link your name to past problems.

3. Getting an EIN

If you plan to hire employees, file an excise tax return (for example, for alcohol, tobacco, or firearms), or file a pension plan tax return, you’ll need an EIN.

If you’re operating a sole proprietorship, the IRS typically allows you to file an EIN using your Social Security number as a taxpayer identification number (TIN).

If you don’t have an EIN, you can get one online or by filling out IRS form SS-4 (application for employer identification number).

Apply for sole proprietorship online 

1. Create a unique business name

2. Create a letterhead, a business card with your business name, a logo, a phone number, and your physical office address

3. Create a free account on FBR’s website. Create a National Tax Number on IRIS. You will need a rent agreement for your office or house. You may also require an electricity bill.

4. Take your Cnic, Letterhead, Business Card, NTN Copy, and a stamp of your new business name. Open a bank account in your name. Provide you with account details (Account maintenance / welcome letter)

5. Congratulations! Now you are registered as a sole proprietor

6. You can now apply for a GST Number. If required, you can apply for a GST Number, Chamber of Commerce, PEC, PSEB or WEBOC if required.

7. There is no official certificate in case of sole proprietorship You will only receive an NTN Certificate with your name & details on it.

Difference between sole proprietorship and LLC

  • In an LLC, you are not personally liable for any debts or lawsuits, whereas, in a sole proprietorship, you do not have to worry about any state paperwork or annual filing requirements.
  • In LLC, it’s easier to get equity & and all business loans, while in sole proprietorship, it’s easy to file taxes using your personal tax returns, and you could save up to $5, depending on how much you make as a business owner.
  • In LLC, you can file your taxes separately, which may reduce your Social Security benefits depending on business profits, while sole proprietorship is limited to one owner, making it easier to make decisions.
  • LLCs have unlimited owners and more market power, while in sole proprietorship you are personally liable for any lawsuits or bankruptcies your company faces.
  • LLC charges additional fees, including state paperwork. In sole proprietorship licenses, annual state invoices, etc., it is more challenging to build business credit.

Convert sole proprietorship to LLC proprietorship 

1Research and Planning:

  • Understand the implications of forming an LLC, including legal, tax, and financial aspects.
  • Determine if the LLC structure aligns with your business goals and needs.

2. Choose a Name and Register:

  • Select a name for your LLC that goes on with state regulations.
  • Register the LLC name with the appropriate state agency.

3. File Articles of Organization:

  • Prepare and file the Articles of Organization with your state’s Secretary of State office.
  • Pay the required filing fee.

4. Obtain Necessary Permits and Licenses

  • Acquire any new licenses or permits needed for the LLC.
  • Update existing licenses to reflect the new business structure.

5. Transfer Assets and Contracts:

  • Transfer business assets from the sole proprietorship to the LLC.
  • Review contracts and agreements; update them to reflect the new entity.

6. Obtain an EIN:

  • Obtain an Employer Identification Number (EIN) for tax purposes from the IRS.
  • This number is necessary for opening a business bank account and filing taxes.

7. Notify Stakeholders:

Inform customers, vendors, creditors, and other stakeholders about the change to the LLC.

8. Update Tax Status:

Elect the desired tax classification for the LLC with the IRS (such as partnership, corporation, or sole proprietorship).

9. Create an Operating Agreement:

  • Draft an operating agreement outlining the ownership, management, and operational procedures of the LLC.
  • Although not required in all states, it’s advisable to have one.

10. Maintain Compliance:

  • Comply with ongoing filing requirements, such as annual reports and taxes, to maintain the LLC’s legal status.
  • Remember, legal and financial considerations can vary based on location, so it’s wise to seek guidance from professionals familiar with the laws in your state.

Features 

A sole proprietorship is a business organization created by the owner. There are no legal requirements for starting a sole proprietorship organization. However, in some cases, there may be legal requirements or the owner may need a license or certificate to operate the business. 

Example

A goldsmith or a medical shop owner would need a license to operate this type of business.

1. Liability 

In a sole-owner business, the owner has full control. In this situation, the owner is responsible for all the debts. If the owner takes out a loan for his business, then he will be responsible for all the liabilities.

Example 

If the sweet shop owner takes out a loan, he or she is solely liable for the loan repayment to the bank.

2. Sole risk-taker and profit-taker

The sole proprietor is solely responsible for all the risks associated with his or her business. The sole proprietor is entitled to all the profits or losses of the business.

3. Control 

Since the sole proprietor holds all the rights and obligations, he or she controls all the business operations. No one can interfere with a sole proprietor’s business activities. Therefore, the sole proprietor is the only one who can change his or her plans.

4.No Separate Entity

Under the accounting system, owner and business are treated as the same. However, the law does not distinguish between a sole trader and his business. Without the sole trader, a business has no identity as he is the sole trader who carries out all the business activities.

5. Lack of Business Continuity

The sole proprietor’s death, imprisonment, bodily injury, mental illness, or bankruptcy will have a direct impact on the business, or it may result in the business ceasing to operate. The sole proprietor’s beneficiary, successor, or legal heir can manage the business on their behalf.

Advantages 

Here are some of the most popular benefits of being a sole proprietor:

1. Quick decision-making 

 A sole proprietor can make any decision at any time, so the decision-making process would be quick because they don’t need to ask permission from others.

2. The confidentiality of information

 As the sole proprietor of the company, he/she has the right to keep all business data confidential.

3. Direct incentive

 Direct incentive- The sole proprietor directly benefits from a company’s profits or benefits.

4. Sense of accomplishment

He/She can have the personal fulfillment that comes with working independently or alone.

5. Easy to set up and close- One

The business can be taken over by the proprietor with minimal legal requirements.

Muhammad Ali Naeem

Muhammad Ali Naeem's journey from a data science enthusiast to a Master's graduate from the University of Essex and a proficient SEO expert showcases his dedication, versatility, and unwavering commitment to making a positive impact in both the academic and professional realms. His story Serves as an inspiration to those looking to blend the power of data with digital marketing strategies in today's digital age. Moreover, he is the founder and CEO of Digital World PVT Limited Company located in London United Kingdom. He likes to write on different topics also he is a publisher on many top-ranked sites.

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