When you open a new business, there are a few different ways you can organize the company from a legal standpoint.
Before selling goods or services, you'll have to decide how to structure ownership. Depending on who's involved, you can choose to incorporate, form a limited liability company partnership or set up a sole proprietorship.
That last option is the simplest business structure. It suggests that a single individual owns the company and is responsible for any corresponding liabilities.
Among the different types of business ownership, there is some flexibility with sole proprietorship arrangements. When you’re starting out, it’s worth talking to an accountant or startup lawyer to figure out how you want to set up your business.
This sole proprietorship guide answers some of the most common questions you might have. Click to jump to the topic you’re interested in:
- What is a sole proprietorship?
- Can a sole proprietorship have multiple DBAs?
- Can you have multiple businesses under one sole proprietorship?
- Can a sole proprietor have multiple locations?
- Can a sole proprietorship have more than one owner?
What is a sole proprietorship?
A sole proprietorship is popular for one-person operations or freelancers who don't have complex operations. Typically, reporting income and expenses is fairly straightforward.
This is the value of the sole proprietorship — especially since you can also explore how to own multiple businesses.
Business owners can file taxes as part of their personal return and not fuss with a separate report. Registering the entity with federal and state agencies is typically an easy process. You'll need to establish an employer identification number (EIN) with the IRS, and you're off to the races.
The downside, however, is that you're not creating a separation between the personal you and the business entity.
For instance, if you were to go into debt in the name of the business — and couldn't pay it back — you'd be personally responsible for loans or credit card bills. Lending institutions could target your personal assets and bank accounts to resolve business obligations.
Can a sole proprietorship have multiple DBAs?
Yes, but it depends on your geographic location and if they allow for multiple business names.
When you establish a sole proprietorship, you have a couple of choices for naming the business entity. You can:
- Use your own name and pay taxes under that moniker
- Choose a catchier name that might reflect the nature of your business
Either option usually works with taxing bureaus. As a sole proprietor, your given name would be your company’s legal name. If you select a different name, that is known as a "doing business as" option or DBA. It’s also known as a fictitious business name, trade name or assumed name.
So, for example, Francine Smith could operate under Fran's Fabulous Footwear, which works from a legal angle if the name is registered with county or state agencies.
A sole proprietor can have multiple DBAs for unrelated businesses under the umbrella of a single taxpayer identification number (TIN) or EIN. Check with your county or state agency to see if multiple DBAs are allowed.
TIP: Some states don't allow multiple DBAs, so if that's your intent, you may want to explore setting up a limited liability company (LLC). Under an LLC, you can house many different businesses with unique names.
Can you have multiple businesses under one sole proprietorship?
Yes, a sole trader can have more than one business. The easiest way to understand how to own multiple businesses under a single sole proprietorship or tax ID is from the perspective of a tax return.
Suppose you're a small business owner who opts to show business income on a federal 1040 form. In that case, you will report that revenue on Schedule C. In that document:
- Part I helps you calculate your business's gross profit and gross income.
- Part II is where you list business-related expenses such as advertising, vehicle expenses, business insurance and more.
If you have two businesses, you’ll need to file multiple Schedule Cs — one for each business. But, you can include all the forms and calculations with your personal income tax return under your TIN, which distinguishes your sole proprietorship.
For example, say you own a personal training business, but you also cut hair on the side. You’d fill out two Schedule Cs, entering amounts per line item on each dollar spent solely on that business.
Bottom line, you can have multiple businesses under one sole proprietorship. But, the business activities must be very different from each other.
TIP: When you have multiple businesses operating under one sole proprietorship, if one business gets sued, both businesses’ assets are at risk.
Can a sole proprietor have multiple locations?
Yes, sole proprietors can operate in multiple locations. However, it's the owner's responsibility to ensure they’re meeting all state registration and business license requirements.
If you’re operating in multiple states, you’ll typically have to register with state and local government agencies, such as a department of commerce or a tax commission. This usually involves some paperwork and a small fee. You’ll also need to register any DBAs of the sole proprietorship for tax purposes.
TIP: Every state has its own income tax requirements. Before operating in another state, talk to a tax professional, so you get a full understanding of your tax obligations.
Can a sole proprietorship have more than one owner?
A sole proprietorship cannot have more than one owner. This is because income and expenses from this one-owner business entity get reported on a personal tax form. The business’ information blends with salary, personal exemptions, applicable child tax credits and more.
So, if you're considering taking on a partner or two, you'll need to explore a different business structure. For example, you can form a general partnership that doesn't require any official registration with the state.
Keep in mind that you'll have to determine how to divide income and expenses between two or more partners. This agreement will also apply to the personal liability for any debt or legal actions incurred by the partnership.
TIP: A formal written agreement drafted by an attorney is a smart move to avoid conflicts if the business experiences financial difficulties.
NEXT helps protect and get your business off the ground
You'll want to have your formal business structure decided before conducting any sales through DBAs and single or multiple sole proprietorships.
To protect your company’s assets and avert a potential financial disaster, a comprehensive sole proprietors business insurance plan is a must-have. NEXT Insurance provides expert advice and solutions so you can get the right amount of coverage for your business.
We offer some of the most common sole proprietorship coverages, including general liability, commercial property and workers' compensation policies. Our streamlined online application allows you to see coverage options, pricing and purchase policies — all in less than 10 minutes. As soon as your purchase is complete, you can access your certificate of insurance immediately online.
If you have questions, our licensed, U.S.-based insurance professionals can help.