When you decide to open a business, you must choose a business structure. While there are several options, if you are just starting out and plan to “go at it alone,” then a sole proprietorship may be the best option.
However, there are some potential downsides to this structure. Understanding more about it will help you decide if a sole proprietorship is right for you.
What does it mean to be a sole proprietor?
As a sole proprietor, you are starting a business venture all on your own. This means you must save money and pay estimated tax payments. You file business-related tax information on your personal tax return because you are the business.
Additionally, there’s no distinction between you and the business. This means you are personally liable for damages, debt and financial losses if a lawsuit is filed.
What’s the process of becoming a sole proprietor?
Making your business a sole proprietorship “officially” isn’t difficult. There’s no paperwork that you must file to get started, but you should research the permits or licenses that may be required.
You will typically use your own Social Security number as your business ID since there’s no legal separation between the two.
You can create some separation with an EIN (employer identification number). Some sole proprietors prefer this because they can avoid giving out their Social Security numbers. Also, if you ever decide to hire an employee, you must have an EIN.
Knowing your rights when establishing a business structure
No matter what business structure you choose, you need to ensure that you follow the legal requirements. This will ensure your business operates properly and that you don’t encounter any issues that could haunt your future.