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	Steven D. Strauss Author of The Small Business Bible
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	Tom Severance Author of Business Start-Up Guide
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	Stephanie Chandler Author of The Business Startup Checklist & Planning Guide
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	Joe Kennedy Author of The Small Business Owner's Manual
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Sole Proprietorship

Description

Also known as proprietorships or DBAs (“Doing Business As..."), sole proprietorships are the simplest business structure. In fact, if you make no effort at all to formalize your business (not a good idea), then you are a DBA.

As the name implies, a sole proprietorship can be owned by only one person; if others are involved, another business structure must be chosen. Unlike corporations and L.L.C.’s, a sole proprietorship is not a separate legal entity. The small business owner remains personally accountable for the liabilities, debts, covenants, contractual commitments, and taxes of the business. This includes claims made against employees acting within the course and scope of their employment. If, for example, one employee accuses another of sexual harassment and wins, your sole proprietorship must pay the judgment and everyone’s attorney fees.

A sole proprietorship does not have “perpetual life.” When the small business owner dies, the business simply ends. The assets are normally distributed under the terms of the deceased owner’s will; however, the probate process may last 12 months or more, and this may cause difficulties if the heirs desire to operate or sell the business or its assets.

If a small business needs new financing, the sole proprietorship structure may not be right. Banks and related lending institutions, and investors, are uncomfortable working with individuals; most of their agreements are structured as corp.-to-corp. and desire to eschew the many special laws protecting consumers.

To formalize a DBA, you simply need to register the name at the county or local level. In most places, this involves only a small fee.

In general, a “fictitious business name statement” must be registered and published (printed as an announcement a few times in a local newspaper) if the business name is different from the name of the proprietor, partnership or corporation doing business with that name. For example, Amy Apple needs to register the name “Mediocre Advertising.” However, she need not register the name “Amy Apple Advertising.” Additionally, if the business name suggests additional owners, you are also required to file for the use of the name (“Amy Apple & Partners Advertising”).

Registering a name will also prevent others from using it, at least locally. In most cases, registration is all that is needed. Nevertheless, this is not a “bulletproof” way to protect a business name, and others may later contest your right to use it.

Another advantage of registering a business name is that the courts can then be used to file legal proceedings, and the legal system will generally support enforcement of a signed contract under a registered name. Finally, and perhaps most important, banks allow small businesses to open accounts in the name of the business only when proof of business name registration is provided.

Tax Treatment

The federal and state tax treatment of DBAs is also straightforward (which is not the same as reasonable). At the federal level, the small business owner completes a Schedule C (Net Profit from Business), which summarizes the revenues and expenses of the business, and then enters the proverbial bottom line onto Form 1040 (Individual Income Tax Return), which everyone must file personally. If the small business made a profit, that is added to other income, and taxes are due at the normal personal rates. Federal and possibly state and local payroll taxes are also due. Note that income derived in this manner is taxed only once (in contrast to corporations, where income is taxed twice). However, use of the sole proprietorship form of ownership generally results in a reduced ability to minimize and defer taxes.