Starting your own business is a significant step, and one of the first choices you’ll face is picking a business structure. This decision shapes everything from your daily operations to taxes and how much risk you’re willing to take.
To help you with your research, we’ve made this guide to help you decide whether a sole proprietorship is the right structure for you. Let’s dive into this further to understand what a sole proprietorship is, its potential pros and cons, and how you can establish one in Pennsylvania.
Related: Pennsylvania Business Startup Checklist
What is a sole proprietorship?
A sole proprietorship is a business structure where one individual owns and runs the entire business. This is a straightforward setup where the business and the owner are the same entity legally. This means the small business owner is solely in charge of all business decisions and fully responsible for any business debts and liabilities. While this brings simplicity and full control, it also means personal assets could be at risk if the business struggles financially or faces legal challenges. Understanding this structure is vital before you dive into the other steps of starting your business.
Other common business structures include:
- General partnership: A business owned by two or more people.
- Corporation: A more complex structure that offers 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 sole proprietorship.
Related: Comparison of Business Structures
Sole Proprietorship Advantages
- Ease of setup: Sole proprietorships are remarkably easy to start in Pennsylvania. There’s no need for formal paperwork to establish the business.
- Lowest startup costs: Starting a sole proprietorship in Pennsylvania is cost-effective. There are no fees for forming or maintaining this type of business, except if you’re using a name different from your own, you’ll need to file a Fictitious Name Registration with the state.
- Tax simplicity: Tax filing for sole proprietors in Pennsylvania is more straightforward since business income is treated as personal income. This simplicity can save time and reduce accounting costs.
Sole Proprietorship Disadvantages
- Unlimited personal liability: The major downside of a sole proprietorship is that there’s no distinction between your personal and business assets. If your business faces debt or legal issues, your personal assets could be at risk.
- Less business continuity: A sole proprietorship in Pennsylvania is closely tied to the owner. If the owner decides to cease operations or passes away, the business doesn’t continue, which is an important consideration if the business will rely on contracts.
- Difficulty raising capital: Sole proprietors may find it more challenging to raise funds since they can’t sell shares like corporations or LLCs.
While a sole proprietorship offers simplicity and control, its lack of liability protection is a significant concern. If protecting personal assets is a consideration, the Limited Liability Company (LLC) may be a better option. An LLC provides more security for your personal assets while maintaining operational flexibility. This might be a better fit for those who seek a balance between ease of operation and asset protection.
Steps to Start a Sole Proprietorship in Pennsylvania
Creating a sole proprietorship in Pennsylvania involves taking care of a few steps to ensure the business is legally structured and properly registered. Let’s go through the common steps:
Step 1: Come Up with a Business Name
Choosing a unique business name is the first step. As a sole proprietor in Pennsylvania, you can operate under your full first and last name. However, registration is necessary if you plan to operate under a different business name. For instance, let’s consider Jessica Smith, who is launching a homemade soap business. Rather than operating under “Jessica Smith,” she prefers the name “Handcrafted Bliss.” To use this name, Jessica will need to register “Handcrafted Bliss” as her Doing Business As (DBA) name.
Step 2: Verify Name Availability
While choosing your business name, ensure that another Pennsylvania business isn’t already using it. Names can be searched on the Pennsylvania Secretary of State’s website. A business may not register a fictitious name that is the same or significantly identical to another registered business in Pennsylvania.
Related: How To Search Name Availability In Pennsylvania
Step 3: File the Fictitious Name Form
Once you’ve settled on a unique name, fill out the Registration of Fictitious Name form (DSCB:54-311) with the Pennsylvania Department of State Bureau of Corporations and Charitable Organizations.
Registering a fictitious name in Pennsylvania won’t prevent another business from using the same name in another state. To gain exclusive rights to the name statewide, consider filing for a trademark through the U.S. Patent & Trademark Office (USPTO).
Related: How To File A Pennsylvania Fictitious Name
Step 4: Advertise a Legal Notice
Next, you’re required to publish a notice indicating an intent to file or the actual filing of an application for registration of the fictitious name. This legal notice advertisement should appear in two legal newspapers that circulate in the county where your business will be located. If there’s only one such newspaper in the county, publishing in that one will suffice.
Step 5: Research Business License Requirements
Finally, it’s important to identify and obtain necessary business licenses. These requirements vary depending on the type of business and its location. Here are some common ones:
- Local business license: While Pennsylvania doesn’t have a state business license, local business licenses may apply. Consult your city officials or economic development office for more information.
- Sales tax license: Businesses selling products and services subject to sales tax in Pennsylvania need a Pennsylvania Sales, Use, and Hotel Occupancy Tax License from the Pennsylvania Department of Revenue.
- Professional license: Certain professions are regulated and must be registered before offering certain services. Architects, barbers, and vehicle dealers, among others, need specific licenses. The Pennsylvania Department of State provides more details.
- Employer Identification Number (EIN): This unique number from the Internal Revenue Service (IRS) is necessary for some businesses. As a sole proprietor, you’ll need an EIN if you plan to hire employees. Some banks also require an EIN to open a business bank account. If you don’t need an EIN, you can use your personal Social Security number for tax purposes.