Starting your first business and wondering which structure to choose? There are four main types: the sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). Making the right choice is an important first step because it may affect your taxes, how much paperwork you’ll have to deal with, and how much personal liability you might have.
Sole proprietorships are a popular choice in Missouri. Of the 536,754 small businesses in the state, a remarkable 70.5% are sole proprietorships.1 That’s 378,372 businesses operating under this structure, which reflects its popularity.
In this guide, we’ll focus on sole proprietorships and explain their characteristics, advantages and disadvantages, and steps to getting started.
Related: Missouri Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is the simplest and most common business structure for small businesses and entrepreneurs. It’s not a separate legal entity, but rather an individual operating a business as themselves. Very little paperwork is required, as there’s no formal registration or setup process in Missouri to form a sole proprietorship. You can simply start conducting business activities under your own personal name.
While simple, a sole proprietorship has key differences from other structures like corporations and LLCs. It’s important to weigh the advantages and disadvantages when deciding if it’s the right fit.
Sole Proprietorship Advantages
Simplicity and ease of formation: With no formal registration or setup required, launching a sole proprietorship is straightforward. You can get up and running immediately without paperwork hassles or filing fees.
Complete control: As a sole proprietor, you retain complete control over all business decisions and operations. You don’t share control with partners or board members. This freedom and flexibility can be beneficial for many small business owners.
Tax simplicity: Business income and losses are reported directly on your personal tax return. You avoid the additional filings and fees that come with other structures like corporations. This can mean fewer paperwork hassles during tax time.
Sole Proprietorship Disadvantages
Unlimited liability: A major downside is that sole proprietors have unlimited personal liability for business debts and obligations. If your business is sued, your personal assets are at risk. For those wanting liability protection, an LLC offers an alternative.
Business continuity: A sole proprietorship ends if the owner dies, sells, or transfers the business. This can be an issue for a business that relies on contracts with customers and vendors. Other structures allow for more continuity.
Self employment taxes: As a sole proprietor, you’re subject to self-employment taxes. This can mean a higher tax bill compared to some other business structures.
While a sole proprietorship offers simplicity and control, it’s important to consider the potential risks, particularly regarding personal liability. If you’re concerned about liability, an LLC might be a better fit for you.
Related: How To Form A Missouri LLC
Steps to Start a Sole Proprietorship in Missouri
Starting a sole proprietorship in Missouri is straightforward, as it does not require filing any legal documents with the state government to legally create the business entity. However, there are a few steps to cover to ensure your business is correctly set up.
Step 1: Come Up with a Business Name
As a sole proprietor in Missouri, you can operate your business under your full first and last name, but if you prefer a specific business name (as most would), registration is necessary. Let’s say Bob Smith starts a barbecue restaurant named “Bob’s Smokehouse.” To operate under this name, he would need to register it with the state. If Bob ran the business under his first and last name, he would skip the next step.
Step 2: Fill Out the Fictitious Name Registration Form
If your business will operate under a specific name like “Bob’s Smokehouse,” you must register this name. You can file the Registration of Fictitious Name form online or download and mail it to the Missouri Secretary of State.
Related: How To Register A Missouri Fictitious Name
Keep in mind that registering an assumed name in Missouri won’t prevent other businesses from using it. To better protect your chosen name, consider applying for a trademark.
Step 3: Research Business License Requirements
You may need specific licenses to operate legally, regardless of your business structure. These requirements vary based on your business activities and location. Here are a few examples of potential business licenses you may need:
- Local business license: While there’s no statewide business license, you might need a local business license. Contact your city officials or economic development office for details.
- Business tax registration: If your business collects sales tax or employee withholding taxes, complete the Missouri Tax Registration from the Missouri Department of Revenue.
- Merchant’s license: Some counties require a Merchant License for businesses making retail sales. This is in addition to the state business tax registration.
- Professional license: Certain professions in Missouri are regulated and require licensing. Examples include electrical contractors, accountants, interior designers, and tattoo artists. Check with your County Clerk’s Office for specific requirements.
- Employer Identification Number (EIN): If you hire employees, an EIN is needed for tax reporting purposes. Some banks also require an EIN to open a business bank account. Otherwise, as a sole proprietor, you can use your social security number.
Related: Guide To Registering A Business In Missouri
