A sole proprietorship is a straightforward type of business you can establish. The business and the owner are seen as the same legal entity in a sole proprietorship. This means that you have complete control over your business, but you hold personal liability for any debts or obligations of the business.
Steps to Establishing a Sole Proprietorship
- Choose a business name. As a sole proprietor, you may use your own given name or a fictitious business name.
- File a fictitious business name with the Department of State if using a name other than your personal name. The filing fee is $70.
- Obtain any necessary licenses, permits, and zoning clearance for your business activities and location. Requirements vary by industry and municipality.
- Obtain an Employer Identification Number (EIN) from the IRS if you plan to hire employees or need the number for tax purposes.
Taxation and Liability
Sole proprietorships are popular in Pennsylvania because they are easy to set up and have few legal requirements compared to other business structures. As a sole proprietor, you report income and expenses on your personal tax return. The state income tax rate of 3.07% applies to net business income. If your income exceeds $8,000 annually, you may need to make quarterly estimated tax payments.
While sole proprietorships provide flexibility and ease, a key downside is unlimited personal liability. Your personal assets can be pursued in the event of a lawsuit or business debt. Forming a limited liability company (LLC) provides liability protection while allowing you to remain a single owner.
Do You Need a Business License or an EIN?
- A sole proprietorship in Pennsylvania does not require formal setup. However, take steps to protect your interests.
- First, choose a unique, available business name. Search the state database to confirm availability.
- Next, obtain necessary licenses, permits and zoning clearance. Requirements vary by industry and municipality.
- You may need to register for sales tax or other taxes. Consult an accountant on tax requirements.
You can do business under a "doing business as" (DBA) name. For example, file a DBA called “Bob’s Bagels” although your sole proprietorship is under your name Bob Barkley.
Risks and Benefits of Sole Proprietorships
While no separate business entity is created, consider risks. You have unlimited personal liability for debts and legal issues. Business credit and financing is difficult to obtain as the sole owner. Taking holidays can reduce income.
An employer identification number (EIN) from the IRS is not required but can be beneficial. An EIN allows you to open business bank accounts and improves tax reporting. Alternatively, use your Social Security number.
Choosing the Right Business Structure
Sole proprietorships are popular because setup is straightforward. However, an LLC provides liability protection if desired. Consult experts on the best structure for your goals.