Setting Your Small Business Up as a Sole Proprietorship

First published by the Oregon SBDC Network here.

Operating as a sole proprietor is the easiest route to starting your own business compared with forming another type of business structure, like an LLC (limited liability company). Sole proprietorships are popular among solo business owners, consultants, and freelancers, who can conduct business under their own names because creating a separate business or trade name isn’t needed.

Read on to learn the basics of a sole proprietorship, its advantages and disadvantages over other business structures, how to set up your business, and what you need to know to operate your business as a sole proprietor.

What Is a Sole Proprietorship Business?

A sole proprietorship is an unincorporated business with just one owner.

A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered a sole proprietor if you perform business activities but have not registered as any other type of business, like an LLC or a C Corp.

Sole proprietorships are not a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. Therefore, you can be held personally liable for your business debts and obligations.

Sole proprietorships can be a good choice for consultants, businesses with very low risk, and those who want to test their business first before committing to the time and costs of forming a more formal business structure.

What Are the Pros and Cons of Being a Sole Proprietor?

The most significant benefits of a sole proprietorship are the ease of creating one, its pass-through tax advantage, and the low fees for establishing the business.

With a sole proprietorship, you need to register the business with the state only if you are using a name other than your legal name (“real and true” name). However, depending on the kind of business you operate, you may be required to obtain a license or permit. With a sole proprietorship, you can get your business up and running quickly and with less hassle and cost.

The tax process is easier, too, as you are not required to obtain an employer identification number (EIN) from the IRS unless you have employees. You can also use your Social Security number to file and pay taxes.

The disadvantages of a sole proprietorship include the unlimited liabilities and potential difficulties in obtaining business funding from a bank or investors due to being in the early stages of business.

Because a sole proprietorship is not a separate business entity, any business liability can become your own. For example, business creditors could seize your personal assets. Because a sole proprietorship offers no liability protection, you could go personally bankrupt if your business doesn’t succeed or faces unexpected challenges.

Obtaining financing can also be a hurdle with a sole proprietorship. Banks prefer to work with businesses that have a proven financial track record, and sole proprietorships are often start-ups. As an individual starting out, you appear as higher risk to bank lenders. Getting equity from investors can also be difficult, as many prefer to fund more refined start-ups.

However, many entrepreneurs and small business owners begin as sole proprietorships. As their business grows, they can register to become a limited liability entity, such as an LLC, LLP, or a corporation.

Sole Proprietorship vs. LLC: How to Choose?

Depending on the nature of your business, you may be wondering if it would be better to create a sole proprietorship or an LLC. A sole proprietorship is usually a good fit for small businesses with low risk, low profits, and a small customer or client base.

An LLC may be the better fit if your business is associated with some risks, there’s the possibility of raking in large profits, you have a large customer base, you have employees, or you’re in a position where you could benefit from certain tax structures.

How Do You Set Up a Sole Proprietorship in Oregon?

In Oregon, you can start a sole proprietorship without filing any paperwork with the state government, unless you choose an assumed business name, need licenses and permits to operate, or will be hiring employees. Review the steps below to take the necessary actions, if any apply to your sole proprietorship business:

1. Choose a business name.

In Oregon, a sole proprietor may use their own “real and true” name or use a trade name. If you plan to use a business name or a trade name, state law requires that the name be distinguishable from other company names on record. You also want to choose a name that is not too similar to another registered business because of common and federal law trademark protections. To make sure your business name is available, run a search in the following government databases:

• Oregon Secretary of State
• U.S. Patent & Trademark Office (click on the TESS link under Tools)

2. File an assumed business name.

If you use a business name different from your legal name, Oregon requires you to register an assumed business name with the Secretary of State’s Office. This is a mandatory requirement in Oregon. To file your assumed name, you must fill out the Online Assumed Business Name Registry from the Secretary of State Business Registration Service. There is a $50 filing fee.

3. Obtain licenses, permits, and zoning clearance.

Your business may need licenses depending on its business activities. Oregon provides a directory of every profession and occupation requiring a license, and you can obtain this information by visiting the Oregon License Directory. In addition, local regulations—including licenses, building permits, and zoning clearances—may apply to your business. You will need to check with your city and county governments for more information.

4. Obtain an EIN if hiring employees.

Sole proprietors who want to have employees need to obtain an EIN (employer identification number). This is a number issued by the IRS for tax reporting purposes. All businesses with employees must report wages to the IRS using their EIN. You can register for an EIN through the IRS website. Sole proprietors with no employees are not required to have an EIN because they can use their Social Security number to file and pay taxes.

How Do You File Taxes as a Sole Proprietor?

To file taxes as a sole proprietor, you’re required to complete a Schedule C to report your business’s profits and losses when you complete your Form 1040 for personal income taxes. The amount of taxes you owe will be based on the combined income reported on these forms.

The Bottom Line

A sole proprietorship is a straightforward way for individuals to start their own business. In some situations, it does not require registering with your state or obtaining an EIN with the IRS. However, keep in mind the risks involved and the liabilities that can be passed from the business to you personally. But if you operate a low-risk business, being a sole proprietor presents a quick, easy, and low-cost way to get your business up and running.

For professional guidance specific to your situation, contact your attorney or CPA.

Need Assistance?

The PCC Small Business Development Center is here to support you with no-cost business advising and comprehensive business training programs. Get started by requesting your first no-cost business advising session here.