Formation of a sole proprietorship is your first step to getting your business up and running. You may be learning how to establish a sole proprietorship because you need to balance life and work, or you have a great idea that will be financially rewarding, or you want freedom to work in a way best for you. Creating a sole proprietorship could be the way to go and we are here to help.
Below, you will find all the information you need to begin establishing a sole proprietorship. Topics include:
A sole proprietorship is a form of business where the owner, the sole proprietor, directly owns all of the assets of the business and is directly responsible for all of the liabilities. The sole proprietor and the sole proprietorship are, by law, one and the same. This means that contracts and other legal obligations are in the name of the sole proprietor. Traditionally, formation of a sole proprietorship is relatively straightforward. Which is why people interested starting a business look for facts about sole proprietorship.
Why choose sole proprietorship? Sole proprietorship is often the easiest and least-expensive way of starting a business. You don’t need to form an entity because a sole proprietorship is unincorporated. The following table explains the strengths of sole proprietorship and some limitations.
|Sole Proprietorship Features||Pros / Cons of Sole Proprietorship|
|Few legal organizational requirements||Least costly business organization|
|Can be formed quickly|
|Can be formed easily|
|No operational formalities: no bylaws, shareholder meetings, board of directors, etc.||Can be operated easily and flexibly|
|Sole proprietor (person) and sole proprietorship (business) legally one-and-the-same||Sole proprietor has unlimited liability for sole proprietorship’s debts, liabilities, and contracts*|
|Sole proprietor has unlimited liability for sole proprietorship’s torts (e.g. slip and fall)*|
|Sole proprietor has unlimited liability for sole proprietorship’s agency liability (e.g. actions of employee)*|
|Simple tax treatment||Income, gain, loss, and/or deductions are reported on the sole proprietor’s tax return|
|No annual corporate franchise tax or LLC tax|
A basic understanding of sole proprietorship law will help you decide whether to create a sole proprietorship. First, determine whether you are “doing business.” If you’re not “doing business,” you may be able to avoid establishing a sole proprietorship. For legal purposes, in New York, “doing business” means that you are involved in a continuous course of business activity designed to generate profits. If that interpretation of “doing business” fits your situation, then read on to learn how to make a sole proprietorship.
Sole proprietorship documents, in New York, are generally limited to filing a business certificate that give information about the sole proprietor (person) and the business name of the sole proprietorship. This sole proprietorship application is usually referred to as the “doing business as” or “D/B/A” certificate. It’s possible that your sole proprietorship may be subject to additional requirements, such as licensing requirements. But typically, the “doing business as” business certificate is all of the sole proprietorship paperwork. New York does not require articles of sole proprietorship.
There are other New York legal requirements that may impact your sole proprietorship.
The sole proprietor (person) owns the sole proprietorship. This means that if you continue in your sole proprietorship formation, you will be the sole proprietor who owns your sole proprietorship. As the sole proprietor, you will be the person who receives the profit from a sole proprietorship. However, with ownership comes responsibility. One of the facts about sole proprietorship is unlimited liability. Sole proprietors have unlimited liability for the contracts, torts (e.g. slip and fall) and agency (e.g. employee mistakes) liability of the sole proprietorship.
To learn how to eliminate unlimited liability, Download “What the Other 5% do to Sleep Easy At Night.”
Part of creating a sole proprietorship is deciding on a name for your new business. The legal name of your sole proprietorship is the name on the “doing business as” business certificate that you file. Your “D/B/A” certificate must provide the company name that your sole proprietorship will do business under. Your sole proprietorship business name is also known as your “trade name,” the name that you the sole proprietor (person) uses to conduct business as a sole proprietorship (business).
In New York, if you are a sole proprietor (person) conducting business under a name other than your own, then you are required to make a fictitious name filing which is also known as a sole proprietorship “doing business as” certificate. The sole proprietorship business certificate notifies the public that you are doing business under a name other than your own. The point is to prevent a person from using an unregistered sole proprietorship to deceive and rip-off the public.
If you do business under a sole proprietorship business name that you do not register, you may expose yourself to criminal liability. Failure to make the fictitious name filing is punishable as a misdemeanor.
A misleading sole proprietorship name can also get you into trouble. For example, by law, a New York sole proprietor is prohibited from using the words “& Co.” or “and Company” in the sole proprietorship name if there are no other participants in the business. A misleading name is punishable as a misdemeanor crime.
Formation of a sole proprietorship in New York may require that you register your sole proprietorship. The main filing is the “doing business as” sole proprietorship business certificate. If you are an individual, doing business in New York, using a name other than your own name, then you may need to register a sole proprietorship.
To register a New York sole proprietorship, you file a “doing business as” or “D/B/A” certificate that gives your business name, address, and information about you, the person doing the business. You will need to sign the certificate and have it notarized. After signing and notarizing, file the certificate in the office of the clerk of each county that you plan on doing business in.
The office of the county clerk is where you “register” your sole proprietorship. Depending on the county, the office of the county clerk may facilitate online filing. It’s probably more likely that you will need to go to the office of the county clerk or possibly mail or courier the sole proprietorship D/B/A certificate. The cost of the filing may depend on the particular county clerk or services that you are requesting, so you will need to check. Remember, you will need to register the sole proprietorship in each county that you plan to do business in.
The law requires you to prominently display a certified copy of each “doing business as” sole proprietorship certificate at each business location.
The traditional structure of a sole proprietorship is very simple. The sole proprietor (person) directly owns, in his/her individual capacity, all of the assets of the sole proprietorship. The sole proprietor is also directly responsible for all of the liabilities of the sole proprietorship. Because a sole proprietorship is an unincorporated business, a sole proprietorship incorporation involves converting a sole proprietorship into a corporation.
To learn about an alternative sole proprietorship structure that limits your liability, Download “What the Other 5% do to Sleep Easy At Night.”
The management of a sole proprietorship is centralized, focused around you, the sole proprietor. Any “manager” that you employ is your agent, directly responsible to you. As the sole proprietor, you yourself are directly liable for the actions or inactions of your agent.
Like any business, a sole proprietorship can have employees. A sole proprietorship with employees will need to comply with New York Workers’ Compensation Law. That means the sole proprietorship will need to get workers’ compensation insurance either: (i) through the State Insurance Fund or an authorized company; or (ii) the sole proprietorship must demonstrate its ability to self-insure; or (iii) the sole proprietorship may participate in a group self-insurance plan.
Sole proprietors are usually limited in their ability to capitalize their business with outside funds. Most sole proprietors self-fund using their own cash and assets. Various forms of credit may be directly available to the sole proprietor him/herself such as credit cards or direct loans. Basically, sole proprietorship loans are loans made directly to the owner of the sole proprietor. The lender is likely to require a personal guaranty, and may go so far as to demand that your spouse also guarantee the loan, whether or not the spouse is involved in the business.
To learn more about a helpful sole proprietorship alternative structure, Download “What the Other 5% do to Sleep Easy At Night.”