What are the advantages of a Sole Proprietorship?

Taking the leap to start a business is very exciting. The processes and governmental/administrative tasks necessary to start and run a business in the United States can be less exciting and more confusing. GovDocFiling is here to remove the angst and aggravation of filing government documents. We have guided hundreds of businesses — big and small — through the steps to start, build and grow their business.

The first official administrative step to starting a business is selecting which entity type is the best fit. There are five main types: Sole Proprietorship, Partnership, Limited Liability Company (LLC), S-Corporation and C-Corporation.

The type of entity you register is important because it determines the following for you and your company:

  • How profits are taxed by the IRS
  • How you will be treated in a lawsuit
  • The type of bank account you can open
  • Additional tax forms required

Which entity type is right for my business?

Take our entity type survey to see which entity type best fits your business needs.

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Once you have determined your entity type, you’ll need to obtain an EIN. EIN stands for “Employer Identification Number,” and is also referred to as a TIN, Tax ID Number, Federal Tax ID, Federal EIN or FEIN. All of these names refer to the same thing — a nine-digit number assigned to all entities by the Internal Revenue Service (IRS).

Start the Tax ID/EIN application here

What is a Sole Proprietorship?

You can have a business as an individual without going through the process of forming an LLC or Corporation. In this case, you are a Sole Proprietor. The biggest difference between a Sole Proprietor and an LLC or Corporation is liability and taxation protocol. Sole Proprietors are a simple entity where no additional formation is required by the state or IRS, other than an EIN/Tax ID.

IRS’ definition of a Sole Proprietorship: A Sole Proprietor is an individual who owns a company that is not incorporated or registered with its state as an LLC. Properties of a Sole Proprietor:

  • The business does not exist separately from the owner of the Sole Proprietor/individual
  • The risks of the business apply to the individual person’s assets, including those not used for the business
  • The Sole Proprietor reports business income on his or her personal tax return
  • A Sole Proprietor may or may not have employees

Taxation and liability of a Sole Proprietor

The type of taxation required of a Sole Proprietor is called “pass-through taxation,” meaning that all of the profits and losses from the business will pass through to the individual’s personal tax return. The profits and losses from running your business will go on form Schedule C of the owner’s personal tax return to the IRS.

When reporting profit and loss as a Sole Proprietor, you are required to pay a self-employment tax of 15.3 percent to the federal government.

The individual is 100 percent liable for business and personal assets at risk in a lawsuit.

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Example of a Sole Proprietor

You started making jewelry and selling it on Etsy.com. You are making an income from selling the jewelry, and you have costs of making and selling the jewelry. You want to open a bank account for the business that is not your personal bank account. In this case, you will need to file for an EIN/Tax ID for the entity type of Sole Proprietor/Individual.

As another example, if you hire someone to work in your home, such as a nanny or caretaker, and you pay for their services, you are considered a household employer and should also obtain an EIN/Tax ID to account for the payment made to the employee.

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Tax ID for Sole Proprietor and DBA

The legal name associated with an EIN/Tax ID of a Sole Proprietor will be the name of the individual. How you enter your name on the application for an EIN will be the legal name of the EIN. You can choose to include your middle name or not.

Individuals are allowed only one Sole Proprietor EIN/Tax ID in their lifetime. If you applied for and received a Tax ID from the IRS at some point, but no longer need that EIN or would like to get a different Sole Proprietor EIN for a different purpose, you will need to cancel the original EIN with the IRS. To do this, you must mail a handwritten letter to the IRS with your existing EIN, Social Security Number (SSN) and signature.

You can still have a Sole Proprietorship entity type even if you choose to name the business something other than your personal name. This is called a “Doing Business As” (DBA) or “Fictitious Business Name.” You will need to file the appropriate forms to form a DBA with the county in which you are running your business.

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Quickly obtain an EIN/Tax ID for your Sole Proprietorship

If a Sole Proprietorship sounds like the right option, you will want to get a Tax ID Number so you do not have to use your Social Security Number in business matters.

With your federal Tax ID Number, you will be able to the following things:

  • Apply for a bank account in the name of the company
  • Acquire credit in the name of the company
  • Separate personal identities from most business dealings
  • Hire and pay employees
  • Engage in business with other types of organizations, including Trusts, IRAs, Estates, Non-profits, farmers’ cooperatives and plan administrators

Start Sole Proprietor/Individual Tax ID Application