There are many types of businesses and sole proprietorship is one of them. In fact, this type of business is the easiest to establish. Sole proprietorship is basically a one-person business. In other words, this type of business is managed by one person only, as there are no partners or shareholders. Unlike LLC or limited liability companies and corporations, sole proprietorship business is not required by law to be registered in the state for existence. Sole proprietorship businesses are usually started with small capital and this is the reason why these businesses are found in millions. For example, in United States, there are more than 26 million sole proprietorship businesses that offer different types of products and services.

Necessary Requirements for Starting Sole Proprietorship Business

For starting a sole proprietorship business, it is very necessary that a person has an idea about the products or the services that would be sold. Selection of products and services should be done very carefully.

Since competition has grown strong in all types of business activities, survival of business depends heavily on the type of products and services that are being sold by the business. Writing a business plan is as important as selecting a product or service for sale.

Business plan serves as a roadmap and helps businessperson in achieving targets in desired manner. Business plan also helps in focusing on key issues of business. For example, for starting the business, capital is required. There are many sources from where money can be obtained and business plans helps in selecting the best option.

Like other businesses, sole proprietorship business is also required to have a name. While selecting the name of business, it should be ensured that no other businessperson is using same name. If a person plans to make a website, a domain name should be selected. This domain name is generally the name of the business. Even if it is not possible to set up the website immediately, domain name can be reserved by registering the site. Before registering, availability for the domain name should be checked.

One aspect that must be understood at the very outset is that in the event of lawsuit filed against the sole proprietorship firm, owner does not get the protection against personal assets. Thus, parties to business that have filed suit can have claim over the personal assets of proprietor.

This is the reason why a person is allowed to run the business in his or her name. However, if a sole proprietor wishes to represent the business through an assumed name for protecting the privacy or for making the business name special, he or she can get DBA registered with the county clerk. This allows him or her to use ‘Doing Business As’ while mentioning the name of business.

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Next requirement for starting a sole proprietorship business is sale license. Laws regarding sales license vary greatly from one state to another or from one county to another. Exact information regarding sale license requirements can be obtained from country clerk. In some cases, permits may have to be obtained for running sole proprietorship business. As sales are made by business, sales tax is required to be paid.

There are some other taxes also that may be charged in due course of business. In some cases, resale certification may have to be provided to wholesalers. In the absence of resale certification, they may charge taxes on the items sold by them.

Resale certification is generally required when purchases and sales are made by business in same state. If sales are made outside the state, resale certification may not be required. If sole proprietorship firm has been opened by a professional like engineer for providing services, necessary certification from educational institute may be required. If business involves some sort of risk, a person may be needed by law to have necessary certification.

Though it is not mandatory to get the legal protection for the business name, it is better if trademark is obtained for same. This prevents other people from carrying out business in same name. Trademark proves to be very useful when business succeeds and becomes one of leading businesses of state or when brand is greatly established.

Finance is one of the major prerequisites for starting a business. While starting the sole proprietorship firm, personal finances must be separated from business finance. This helps in preparing financial statements in the name of business. Even tax returns are also prepared in the name of business.

Business finance is also kept separated from personal finance in order to show tax authorities that business is being done for making profit and if there is any loss suffered, it is legally deductible. In initial months or years of business, many sole proprietorship firms incur losses. For setting up business finance, a business bank account is needed. In this account, only business income should be deposited.

Similarly, only business expenses should be paid through this account. Some of the commonest business accounts opened by sole proprietorship firms are checking account, cash credit account or business lines of credit, bank guarantee account and term loan account.

For paying business expenses easily, business credit card is required. Recordkeeping of business transactions is also necessary and important. For this purpose, software can be purchased. If business has low number of transactions, accounts can be maintained manually.

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A sole proprietor should be prepared for paying taxes. Thus, annual returns must be filed with appropriate tax authorities. Annual income and expenses are shown in these statements. If there are no employees in the business, social security number can be used for operating business and filing returns. However, if there are staff members, EIN or employer identification number is required.

Since many types of risks are associated with conduct of business, it is better if protection in the form of insurance is obtained. Insurance cover should be obtained against all types of unexpected events. For example, property and liability coverage can be taken for getting protections against loss done to business property.

For this purpose, either separate policy should be bought or necessary changes are made in homeowner’s policy. If a sole proprietor uses his or her personal car or any other automobile for business purpose, auto insurance with appropriate cover must be bought.Businesses having employees may also go for health coverage. In some cases, sole proprietor may not be able to work. For getting protection against this, disability coverage can be obtained.