Solopreneur vs. Sole Proprietor: What’s the Difference?
What is the difference between a solopreneur vs. sole proprietor? The actual steps you take to establish as a legal entity. Here is how you get started.
Most businesses begin with just one person and an idea. As you start your business, it’s most likely that you are a solo entrepreneur, or a “solopreneur” for short, which is a single-person owned business. A sole proprietor, on the other hand, is a legal structure for a business that is owned and operated by a single individual. So what exactly is the difference between a solopreneur vs. sole proprietor? It’s the action steps you take to establish your business as a legal entity. Here is how you establish yourself as a sole proprietor.
According to SBA.gov, “You do not have to take any formal action to form a sole proprietorship. As long as you are the only owner, this status automatically comes from your business activities.” That said, there is a difference between working for yourself informally and doing the legwork to set up the business structure required to be a sole proprietor for legal and tax purposes, which is highly recommended.
How do I legally register my business as a sole proprietorship?
A sole proprietorship is a business owned and run by a single individual. First of all, it’s important to understand that if your business is a sole proprietorship in your own name, you legally do not have to register your business. For this reason, a sole proprietorship is considered to be the easiest type of structure to set up. That doesn’t mean there are no regulations to follow, however. Setting up your business as a sole proprietorship has implications as far as taxes, financing, and your personal liability. The procedure will vary from state to state, but the steps to acting as a sole proprietorship are very simple.
1. Choose a business name
Your business may be your own personal name or something more creative that describes the business. If you’re using a business name that differs from your name, most states will require it be different from any other business name currently in use in the state in which your business operates. If your business name differs from your personal name, then check your state requirements and do a search with the appropriate agency to make sure the name is available. To do this, perform an internet search for “business entity search” plus the name of your state to find the agency.
2. Register your business name
Many states require sole proprietors to register your Doing Business As (DBA) name—unless you are simply using your own personal name as your business name, in which case there is no need to register with your state.
Even if your town or state doesn’t require a DBA filing, you most likely won’t be able to open a bank account with a fictitious name unless you have proof that it’s been registered. Depending on where you’re based, registering your DBA is done with either your county clerk’s office or with your state government.
3.Get the appropriate licenses and permits for your business
No matter what type of business you are running, it’s important to make sure you are appropriately licensed in your state to offer your services, including when you are operating as a sole proprietor.
Most states will have a database of professions and occupations and the licenses required. Search online for your state and “professional licensing.” Also file any local paperwork required where you’re doing business, such as local safety or zoning permits.
4. Should a sole proprietor get an EIN?
An Employee Identification Number (EIN) is a 9-digit number issued by the Internal Revenue Service to keep track of businesses. According to IRS.gov, “A sole proprietor without employees and who doesn’t file any excise or pension plan tax returns doesn’t need an EIN (but can get one).”
While you can avoid getting an EIN as a sole proprietor and simply file your taxes using your social security number (or ITIN), there are some distinct advantages to getting an EIN, which is a simple and easy process. Using an EIN instead of your social security number on W9 forms and direct deposit forms you might have to fill out in order to receive payments from others you do business with can help prevent identity theft.
Having an EIN can also help you to open a business bank account and establish business credit. It’s important for tax purposes to keep your business and personal finances separate for easy distinction of business vs. personal expenses, so it is recommended you set up a business bank account and get a business credit card.
5. Pay business taxes
Like all types of businesses, a sole proprietor must pay taxes. Depending on what type of business you’re in, you may have to report sales or other taxes. Income taxes will be filed as personal income on your individual return with a Schedule C attached. You pay all the taxes an employer would otherwise pay for you, such as contributions to Social Security and Medicare, and you may have to pay estimated taxes throughout the year. Speak with an accountant and make sure you understand and follow through on the requirements.
6. Obtain business insurance
A sole proprietorship doesn’t offer you any personal protection from legal claims against the business, so it’s a good idea to get liability insurance. You will also be personally responsible for the business’s financial obligations, which is another reason to obtain a business liability insurance policy.
A sole proprietorship is the easiest business entity to establish. If you use your own name as your business name, there are very few steps you must take in order to establish your business. As long as you are appropriately licensed, you can essentially “hang out a shingle” with your name on it and accept business that comes your way. While this is the easiest solution, you might decide to take some extra steps such as getting an EIN or business insurance for the peace of mind and protections these afford you. If you are looking to save time and money as you start out in business, then establishing a sole proprietorship may be right for you.