What is a sole proprietorship?
A sole proprietorship is a business founded and owned by a single individual. It is the least complicated type of business to set up and the default structure for a business owned by one person that is not registered as another entity type. With this structure, there is no difference between the business and its owner.
Self-employed vs. sole proprietor
For generations many Oklahomans viewed a full-time job as the main path to a successful career. In recent years, however, younger workers have learned that employment does not guarantee the security it once did. The emergence of AI and expansion of the gig economy have emphasized this fact.
As a worker who is not employed by a specific company, you are most likely, by default, operating a sole proprietorship. Unlike a corporation, limited liability company (LLC), or most partnerships that require business owners to file paperwork with the state of Oklahoma and pay filing fees, a sole proprietorship typically requires no such formalities.
The Internal Revenue Service (IRS) automatically considers you to be a sole proprietor if you work as a contractor, freelancer, or other self-employed individual who operates under your own name and have not gone through the formalities to create a legal entity structure for your business.
Starting a sole proprietorship in Oklahoma
As a sole proprietor, you may need to obtain industry-specific licenses and permits to lawfully operate in Oklahoma. You can also file an application to conduct business under a fictitious name, called a doing business as (DBA) name. With a DBA, a sole proprietorship entity is not separate from the individual who runs it. Legally, you are considered one and the same.
Fictitious name certificates do not provide any legal protections but can help sole proprietors conduct business within a certain geographical space under a specified name. (Don’t confuse this with trademark protections that provide certain levels of exclusivity when it comes to brand identifiers such as names and logos.)
Benefits of a sole proprietorship
The initial advantage and appeal of a sole proprietorship is its simplicity. Startup costs are low. Other than paying taxes, there are typically no required filings or registrations. Even tax preparation is relatively simple because the sole proprietorship is not a legal entity separate and apart from the individual business owner and, therefore, is not taxed separately from the individual owner.
As a sole proprietor, you can:
- Report your business profits and losses on your personal income tax return, using your Social Security number.
- Take advantage of tax deductions not available to employees, such as health insurance deductions and business expenses.
- Maintain control your business because there are no shareholders, members, or partners to consider.
- Make every revenue decision, including how much to pay yourself and how much to reinvest in the business.
In other words, you can guide the business in whatever direction you want.
Disadvantages of choosing a sole proprietorship
While the benefits of the sole proprietorship are appealing, there are potential drawbacks to this business structure, including legal exposure. Sole proprietors are fully responsible for the taxes, decisions, and legal consequences of the business.
As the owner and decision maker, a sole proprietor is liable for debts and financial losses that the business incurs. Because the business is not a legal entity separate and apart from the owner, this places your personal assets at risk if the business faces a lawsuit, bankruptcy, or financial trouble.
Additional drawbacks of a sole proprietorship include:
- It’s more difficult to raise capital due to the inability to sell stock, add new owners/members, or secure loans from banks, which tend to see sole proprietors as high risk.
- Difficulty raising capital can lead to problems growing the business.
- Sole proprietors generally must pay a self-employment tax of more than 15 percent on all business income. This tax doubles the Social Security and Medicare taxes employees pay and comes on top of regular income tax.
Not having business partners can be a plus. However, as the business matures and you seek fresh opportunities and investments, outside partners may offer benefits.
Setting up your small business as a sole proprietorship
Making the jump to full-time self-employment could be the fulfillment of a lifelong goal. However, starting a sole proprietorship in Oklahoma may not be as simple as it appears. Depending on the business, industry, and other factors, sole proprietors may need to:
- Choose a business name
- Register a trademark
- Register for licenses and permits
- Purchase a website domain
- Hire employees
- Open a business bank account
- Buy insurance to mitigate personal liability for business losses
- Prove to the IRS that your business is not a hobby to reap the potential tax benefits of sole proprietorship
A sole proprietorship may initially be the right choice for consultants, freelancers, and independent contractors. But at some point, you may decide you have outgrown your sole proprietorship and want to create a formal legal business entity. Choosing the right legal entity structure for your business can help set you up for success as your company grows.
Gungoll Jackson helps sole proprietors do business in Oklahoma
During a meeting with Gungoll Jackson’s corporate and business attorneys, we can discuss the pros and cons of a sole proprietorship, whether it is right for you, how to get started as a small business owner, and ways we can help you meet your business goals. Contact us today to get started.
