Sole proprietorship is one of the simplest business forms one can create to operate a business. The sole proprietorship is not a legal entity; it simply refers to a person who owns the business and is personally responsible for its debts. If you are a sole proprietor, you can operate under your name or operate under a fictitious name. This fictitious name is simply a trade name; however, it does not create a legal entity that is separate and distinct from that of the sole proprietor owner.
A sole proprietorship is simple, easy to set up, and requires minimal costs. For these reasons, it has become a popular business form as the owner only needs to register his or her name and secure local licenses. Thereafter the sole proprietor is ready to open for business. One distinct disadvantage is that the owner of a sole proprietorship remains personally liable for all the business debts up to the extent of the proprietor's own personal assets. In other words, once the sole proprietorship runs into financial trouble, the creditors can bring lawsuits against the business owner. If successful, the owner will be liable to pay using his own personal property and money.
Since a sole proprietorship has no separate identity under the law, the owner typically signs contracts under his own name. The customers of the business also, likewise, write checks in the owner's name. The same is true even if the business uses a fictitious name. One advantage of a sole proprietorship is that an owner can “co-mingle” or mix personal and business properties and funds, which is not possible in a partnership, LLCs, and corporations. Normally, the bank accounts of a sole proprietorship are under its business name. The owner does not observe formalities like voting and meetings associated with the more complex business forms. As with lawsuits, a sole proprietorship can bring them under the name of the sole proprietor owner. Often, businesses start as a sole proprietorship and eventually evolve to more complex business forms as it develops.
Taxation-wise, a sole proprietorship is quite simple as the sole proprietorship's income is earned by its owner. This is attractive because business losses you suffer may offset income earned from other sources. Since a sole proprietor is liable for all the business debts, his personal assets can potentially be consumed by the obligations. If a sole proprietor or even one of his employees is involved in a business-related accident and one is injured or killed, the resulting negligence or tort can be brought against the sole proprietor and his personal assets such as bank deposits, home, and even retirement accounts. In deciding whether a sole proprietorship is right for you, consider the preceding paragraphs. If you have doubts and need a better understanding of its pros and cons, our dedicated team will be more than happy to assist you.
YOU CAN ESTABLISH A SOLE PROPRIETORSHIP IN TEXAS WITHOUT FILING ANY LEGAL DOCUMENTS WITH THE TEXAS STATE GOVERNMENT; HOWEVER, YOU SHOULD UNDERTAKE THESE 4 EASY STEPS:
CHOOSE YOUR BUSINESS NAME
You can either use your given name or a fictitious name provided that it is distinguishable from the name of another company currently on record. It will be wise to choose a business name that is not too similar to another registered business to avoid mishaps with common and federal law trademark protections. You can check the availability of your chosen business name online through the Texas Comptroller of Public Accounts and the U.S. Patent & Trademark Office.
CHOOSE YOUR BUSINESS NAME
You can either use your given name or a fictitious name provided that it is distinguishable from the name of another company currently on record. It will be wise to choose a business name that is not too similar to another registered business to avoid mishaps with common and federal law trademark protections. You can check the availability of your chosen business name online through the Texas Comptroller of Public Accounts and the U.S. Patent & Trademark Office.
SECURE PERMITS, LICENSES, AND ZONING CLEARANCE
Depending on your business activities, you may need to obtain business licenses or professional licenses. You may go to the Texas Occupational Licenses and Permits website to determine whether your profession or occupation requires a license. Your local regulations may also include building permits, licenses, and zoning clearances which may be necessary before starting your business. This information is available through your city and county governments.
FILE AN ASSUMED BUSINESS NAME
Should you decide to use a business name other than your name, it is required in Texas that you register it with the county clerk where you intend to put up the business. This requirement is mandatory, and in doing so, you must fill out an Assumed Name Certificate which is available at your county's clerk office.
OBTAIN AN EMPLOYER IDENTIFICATION NUMBER (EIN)
If you intend to hire employees, you need to obtain an EIN, a 9 digit number issued by the IRS for tax reporting purposes. Every business having employees are required by law to report wages to the IRS using their EIN, and registering for an EIN can be done through the IRS website. A sole proprietor without employees is not required to have an EIN to report their income using their own Social Security number. However, you may want to obtain one for your business as some banks require one to open a bank account, and having it can reduce the risk of identity theft.
SO WHAT IS LEFT TO BE DONE ONCE YOU HAVE REGISTERED YOUR SOLE PROPRIETORSHIP? TO MITIGATE FUTURE RISKS, WE RECOMMEND THAT YOU UNDERTAKE THE FOLLOWING ACTIONS:
OBTAIN GENERAL LIABILITY INSURANCE
Since a sole proprietor will be personally liable for all the business's debts and obligations, a business liability insurance policy may be the only financial protection one can have against unforeseen events.
REPORT ACCURATELY AND PAY YOUR TAXES
You may be required to report sales tax and use tax, depending on the nature of your business. More information can be obtained by registering with the Texas Comptroller of Public Accounts.
REPORT ACCURATELY AND PAY YOUR TAXES
You may be required to report sales tax and use tax, depending on the nature of your business. More information can be obtained by registering with the Texas Comptroller of Public Accounts.
To learn more about sole proprietorship and whether this is the appropriate business form for you, please contact us today, and one of our dedicated team will be more than happy to assist you. We have the relevant experience to provide you with the appropriate business form best suited for you.