What is a Sole Proprietorship anyways?

Business 101

Jun 14

Have you ever just started “doing business”?

Maybe it’s that side hustle shop on Etsy? Maybe you’ve taken on a few freelance clients? Maybe you started consulting, or offering your services without filing any type of business entity or paperwork with your state? Well, you’re operating a sole proprietorship!

So what exactly is a sole proprietorship?

It’s a type business entity that you can generally start just by starting your business! It’s owned and run by one person (or can be owned by a married couple in some states). With Sole Proprietorships, there’s no legal distinction between the owner and the business. Think of it like an extension of the owner - one does not exist without the other.

Sole Proprietorships (“Sole Props” for short) can be a beneficial business entity because they’re easy and cheap to “form”, but there are a few things you should know about them even if you’ve already started business.

You still may need to register with your state.

There’s usually not a lot of registration that needs to be done for a Sole Prop, because you don’t need to file any formal entity paperwork with the state you live and are doing business within. However, you will need to figure out if you have to register your business name with your state.

Sole Props are presumed to operate under the owner’s name. If a business operates under a different name, most states require Sole Props to file a “doing business as” name (also referred to as “DBA”, “Assumed Name”, or “Fictitious Name”). Filing a DBA is generally a two step process - 1) you file the paper work with the appropriate entity (such as the secretary of state, or county clerks office - this depends by state), and 2) you publish a public notice for a certain period of time (this is can be done through any local papers in your area). It’s important to determine if you need to file a DBA if you are using a business name other than your legal name.

Take the following example: Mary J. Smith started her freelance illustration business creating custom prints for sale, and she started her business as a Sole Prop. She decided to use the business name “Mary Jane Designs”. Even though her legal first name is Mary and legal middle name is Jane, since she is not using her legal last name within her business name, many states would consider “Mary Jane Designs” a fictitious name. So, Mary would have to file a DBA with her state.

Keep in mind, you will want to check your business name availability before you begin using that name, so that you do not accidentally infringe on anyone else’s intellectual property rights. Filing a DBA does not give you exclusive rights to your name (for that, you need a trademark).

Sole Props are not exempt from license and permit requirements.

When starting a Sole Prop, you will need to determine if there are any state/federal licenses or permits for your type of business. Sole Props are not excluded from business license and permit requirements, and some states require even small businesses to have a general city business license (hello California!). Depending on your type of business, regulatory or professional licenses may be required, such as hair stylists, real estate agents, and dietitians.

For instance, if you were to start freelance drafting architectural plans for a few independent clients, you will need to be sure you have the proper licensure for the work that you are doing within your state. In some states, there are exemptions that allow unlicensed architects to draft certain types of plans (such as those for single family dwelling plans), but for any non-exempt activities (which could include any multi-unit or commercial drafting) you’d be required to have full state licensure.

Since there is no distinction between you and the business as a Sole Prop, where you live is the state in which you are doing business. You can search your state government’s website to help determine what licensure or permit requirements there are for your type of business.

Sole Props offer little to no liability protection for you or your business.

While Sole Props are one of the easiest ways to start a business, they’re also the type of entity that provides you with the least amount of protection (ie. basically none). You are your business, and your business is you. That means you, the business owner, are personally responsible for all debts, losses, and liabilities of your business. All of your “personal” assets (do you own a car, a house, or have money in savings or other accounts?) could become accessable to pay off any liabilities that the business is unable to pay, such as vendors/creditors requiring payment, or a lawsuit judgment against your business. This also means your “business” assets could be come accessible to pay off any personal creditors you owe.

So why would anyone consider a Sole Prop if there’s no asset protection? Ease of set up, especially if you are just starting a small side-hustle. Filing a business name with the state is generally less money than filing an LLC. You also can just start your business. So if you’ve just started something small (maybe an Etsy shop for your art?) and you’re not bringing in much money (YET!) starting as a Sole Prop is a very easy way to start.

If you want to have better asset protection, or you get to a point where you have a blossoming Sole Prop, you should consider formalizing your business by filing the right entity type for you!