Starting your own business is a big step, and one of the first decisions you’ll face is choosing the right business structure. The structure you select will impact various aspects of your business, such as taxes, liability, and day-to-day operations.
This guide will explain what a sole proprietorship is, its advantages and disadvantages, and how to register one in New York.
Related: New York Business Startup Checklist
What is a Sole Proprietorship?
In New York, a sole proprietorship is a popular option, especially for individuals venturing into the business world for the first time. A sole proprietorship is an informal structure with one business owner. Legally and for tax purposes, the business is the owner. It’s the most straightforward form of business structure to create.
Besides sole proprietorships, it’s good to know about other structures:
- General partnership: Two or more people share ownership, responsibilities, and profits.
- Corporation: A more complex structure offering liability protection but with more regulations.
- LLC (Limited Liability Company): Combines the liability protection of a corporation with the tax benefits and flexibility of a partnership.
Sole Proprietorship Advantages
There are several advantages to operating a sole proprietorship in New York:
- Ease of setup: No formal process or documents are required to establish a sole proprietorship in New York, making it simple to set up. However, if the business operates under a name other than the proprietor’s, you must file an Assumed Name Certificate with the county clerk.
- Lowest startup costs: Starting a sole proprietorship is minimal, with no fees for forming or maintaining the business.
- Tax simplicity: Business income is reported and taxed through the sole proprietor’s personal tax return, simplifying the tax process.
Sole Proprietorship Disadvantages
Operating as a sole proprietorship also comes with several disadvantages:
- Unlimited personal liability: As a sole proprietor, you are personally responsible for all debts and obligations of the business. This exposure can put your personal assets at risk if the business faces legal or financial difficulties.
- Business continuity: The lifespan of the business is determined by the owner. Sole proprietorships automatically cease upon the owner’s death or decision to stop the business. This factor is important to consider if there are contracts with customers or vendors that wouldn’t transfer to a new owner.
- Potential tax disadvantages: Despite sole proprietorships’ tax simplicity, reporting income and expenses on your personal tax return and paying income and self-employment taxes can result in higher taxes than other business structures.
If liability protection is a concern, you may want to consider forming a Limited Liability Company (LLC) instead. An LLC can offer more liability protection than a sole proprietorship and may be better suited to your needs, depending on your specific situation and business goals.
Related: How To Form A New York LLC
Steps to Start a Sole Proprietorship in New York
Setting up a sole proprietorship in New York is a relatively uncomplicated process, as you’re not required to file any legal documents with the state government to establish your business entity. However, to ensure your business is set up correctly and legally, there are several things to research.
Step 1: Choose a Business Name
First off, you’ll need a business name. You can operate your sole proprietorship in New York under your full first and last name. But if you choose to conduct business under a distinct name, you must register it. Here’s an example to illustrate this: say Maria Rodriguez wants to open a bakery in New York City. She chooses not to use her name but instead wants to call her business “Sweet Sensations Bakery.” In this case, Maria must register “Sweet Sensations Bakery” as her Doing Business As (DBA) name with the county where the business is located.
Step 2: Confirm Name Availability
Next, before submitting your DBA filing, check the county records to ensure your desired business name isn’t already in use. Most counties conveniently provide an online database for quick searches.
Step 3: File the Certificate of Assumed Name Form
If using a unique business name, your next move should be to file a Certificate of Assumed Name form. This form is available at the County Clerk’s office in whatever county the business will operate. Some offices offer an online version of the form, while others require physical pickup.
Related: How To Register A New York Certificate Of Assumed Name
It’s important to know that registering your assumed name in New York doesn’t prevent another business from using the same name in a different county or state. If you want stronger legal rights to your name, consider applying for a federal trademark through the U.S. Patent & Trademark Office (USPTO).
Step 4: Research Business License Requirements
The license and registration requirements will vary depending on your business activities and location. Here are common licenses you may need:
- Local business license: While New York State doesn’t have a state-wide business license, your city or county may require a local business license. For more details, reach out to your city officials or economic development office.
- Sales Tax Certificate of Authority: If your business sells physical products or certain taxable services, you need to get a New York Sales Tax Certificate of Authority. The New York State Department of Taxation and Finance issues these.
- Occupational license: Some professions in New York are regulated and require licensing before you can offer certain services. These professions include professions such as cosmetologists, barbers, athletic trainers, and home inspectors.
- Employer Identification Number (EIN): Sole proprietors typically don’t need an EIN unless they hire employees. However, some banks may require an EIN to open a business bank account, in which case you can apply for one through the IRS. If not needed, you can use your Social Security Number for tax purposes.
