The easiest and least expensive way to begin operating a
business is as a sole proprietorship. You simply decide to begin
operating the business as a sole proprietor and it's done.
There are no documents or forms needed, unless the business
will operate under a name other than the owner's name. (You may
also have to file forms if you need a business
license, but that's a separate issue). If the business will
operate under a name that is different from the owner's name,
most localities will require you to file a fictitious owner
affidavit. A fictitious owner affidavit informs the local
government and the public that the business is operating under
an assumed name and indicates who the owner is.
In some jurisdictions, a business cannot
begin to operate unless the proper business
license has been obtained by the owner.
To find out more about the requirements in your locality, go
to or call the courthouse located in your county seat. Ask for
the county clerk. The clerk should be able to answer any
questions you have and to give or send you whatever forms you
Choosing between your own name and a
fictitious name can be a difficult decision.
There are a couple of rules of thumb. If you're
reasonably well-known and well-respected in your
community or in your business field, use your
own name. It can be a great marketing tool.
However, there's a risk with using your own
name. If your business fails or gets into
financial or legal trouble, it'll have your name
on it. If you try to start another business,
people may associate your name with the earlier
Once you file your fictitious owner affidavit with the county
clerk, you should, of course, keep a copy of it. You'll need it
from time to time, such as when you open up a business bank
account under the fictitious name.
If you operate under a fictitious name, make sure that you
file an affidavit in each county where you do business. If you
do business across state lines, the rules get a little trickier
because the rules can vary among the states. In that event, you
should discuss your options with your attorney.
Liability. As the owner of a sole proprietorship, you
will be personally liable for all obligations of the business.
Personal liability allows creditors of the business to go after
your personal assets if the business assets are not sufficient
to cover the business debts. Likewise, your personal creditors
can go after your business assets to satisfy your personal
Since you will be personally liable for obligations of the
business, you should consider whether the business will be
exposed to any potential lawsuits. For example, the business can
be exposed to liability for customers injured on the premises or
from products sold by the business. If the possibility of
lawsuits exist, you can limit your exposure by purchasing business
insurance (general liability, malpractice, or product
liability if necessary). Alternatively, you might want to
consider a different business form that would provide greater
liability protection, such as a corporation or a limited
If you are not concerned with limiting
liability because your type of business is
virtually risk-free, a sole proprietorship may
be the perfect vehicle in which to operate your
Advantages of a sole proprietorship
- Control. The owner has complete control over the
- Simplicity. A sole proprietorship is easy to start
- Inexpensive. Startup organization expenses are
minimal since few, if any, legal documents need to be
created to begin the enterprise.
- No double taxation. The business is not treated as
a separate taxable entity. The business income is reported
on the owner's individual tax return and is therefore only
Disadvantages of a sole proprietorship
- Liability. The owner is personally liable for any
obligations of the business.
- Limited ownership. A sole proprietorship by
definition is limited to one person. Thus, if the owner
wants to admit another owner, such as a spouse, family
member, or friend, the sole proprietorship would have to
end. A new business arrangement, such as a partnership,
would be created either by default or by intent.
Tax issues. The tax
treatment of a sole proprietorship is relatively simple.
Business income or loss is reported on the owner's individual
income tax return. The owner may be subject to self-employment
taxes. If the business will hire employees, a Federal Employer
Identification Number will need to be obtained and payroll
taxes will have to be paid. The Federal Employer
Identification Number can be obtained by filing a Form SS-4, Application
for Employer Identification Number.
Among the Business Tools is Form
SS-4. It is in Adobe Acrobat .pdf format,
and you will need Acrobat Reader 4.0 to view the
file and print it. A free version of Acrobat 4.0
is available in the Business Tools area as well.