Forming a Sole Proprietorship

It's All About You

A sole proprietorship is the very definition of going into business for yourself. You are the business and the business is you. And there’s nobody else.

Perhaps the most common form of business organization for startups, a sole proprietorship can be terrific and terrifying. The credit and the blame; the profit and the loss; the freedom and the responsibility; all of it is all yours – all the time.

The upside: It’s simple. It doesn’t cost much to set up and it’s easy to dissolve. The big downside is you’re personally liable for business debts. There are a handful of factors to consider when deciding whether a sole proprietorship is best organizing structure for your business. Let’s touch on a few of the biggies.

  • Complexity and Expense - The sole proprietorship is the simplest form of organization and the least expensive to start. Basically, you just go into business. That alone establishes you as a sole proprietorship. Of course, owners still need to obtain the appropriate business licenses and permits, tax identification numbers, and may need to register the business name. Many people start their business as a sole proprietorship and change the structure later on as the business expands or takes on other owners.

  • Owner Liability - You are personally liable for the debts of the business, even if those debts that exceed your investment in the business. All your assets – both those used in the business and personal property – can be sold to pay business debts.

  • Distribution of Profits and Losses - You receive all the profits from the business – and bear all the losses, which may exceed your investment.

  • Management Control and Decision Making - With no partners or shareholders to consult or satisfy, you have full and complete authority to manage the business, which is great for anyone who wants to call all the shots. It makes it tough to leave the business for any extended period, though, since you’re the only person authorized to make decisions.

  • Financing Startup and Operation - You’re ability to raise capital is generally limited to the amount you can personally secure, meaning sole proprietorships usually have less money available to finance operations or expand.

  • Transferability of Ownership Interest - Pretty simple here. You transfer ownership of the business by transferring the assets to the new owner.

  • Government Regulation - Sole proprietorships, as a form of business organization, are generally not regulated by the state. Other than tax filings and specialized reports applicable to certain kinds of businesses, no special governmental filings or reports are required, making the sole proprietorship the least restrictive, most private form of business organization.

  • Tax Considerations - While there are several tax-related factors to weigh, (rates, impact, capital gains, payroll taxes, etc.), a primary consideration is how income and expenses are reported. In a sole proprietorship, income and expenses are reported on the owner’s individual income tax return, and profits are taxed at the individual tax rate.

Forming a Sole Partnership

If business organizations – meaning the way companies are legally formed and structured – came in a build-it-yourself kit, the instructions would be the model of simplicity.

There are no complicated state laws surrounding the sole proprietorship. From a regulatory standpoint, the owner may need to register the business name as an assumed name with the Secretary of State (we’ll talk more about naming your business in an upcoming post), obtain the appropriate business licenses and tax identification numbers if necessary, and begin operations.

Business Licenses

Not all businesses are regulated or require a license to operate in Minnesota. To find out if the business you’re considering requires a license, certification or permit, visit the License Minnesota website.

Obtaining Tax ID Numbers

Sole proprietors must obtain federal and state tax identification number if the business has employees, even if those employees are members of the sole proprietor’s immediate family.

Let’s start with the feds. To obtain a federal employer identification number (EIN), file Form SS-4 with the Internal Revenue Service. Download Form SS-4 and the SS-4 Instructions.

Sole proprietors who do not have employees, who are not required to file information returns; who do not have a retirement plan for themselves; and who are not required to pay federal excise taxes in connection with their business generally may use their Social Security number as their Federal Taxpayer Identification Number (FTIN).

Now, the state.

A business must obtain a Minnesota Tax Identification Number if it is required to file information returns for income tax purposes, has employees, makes taxable sales, provides taxable services, or owes use tax on its purchases. Most businesses need a Minnesota Tax ID number; however, a sole proprietorship that does not have any of these tax obligations does not.

You may apply for a Minnesota Tax ID Number onlineby phone or by filing form ABR -Application for Business Registration with the Minnesota Department of Revenue. To apply online, you’ll need your federal Employer ID Number (EIN)/Federal Taxpayer ID Number (FTIN), (Social Security Number in some cases); your legal name; the name of the business (Certificate of Assumed Name if applicable); business owner/owners name; business owner/owners social security number; contact name and email address; NAICS (North American Industry Classification Code); and the business begin date.

Obtaining an Unemployment Insurance (UI) Employer Account

Sole proprietors who have employees also need an unemployment insurance employer account number. Registration should be done as soon as possible after the first wages are paid for covered employment. It must be done before the due date of the first quarterly wage detail report the employer is required to submit.

Using the Employer Self-Service System, you can register for an employer account with the state’s Unemployment Insurance system online or by phone. See step-by-step instructions to register a new account online.

The state prefers that the automated phone system be used only by employers who do not have access to the Internet. Call 651-296-6141 and press option 4. If the business is a result of a reorganization of, or acquisition from another business, additional information may be required before a tax rate can be assigned.

That’s All, Folks

Those are the basic steps for forming a sole proprietorship, though sole proprietors who startup with employees – or who expect to have them in the future – should bone up on key issues for employers. Also, nothing we cover here should be taken as business or legal advice. It's not. And it's no substitute for the professional guidance of a lawyer and accountant.

Learn More 

Consultants at our Small Business Assistance Office can help you understand more about partnerships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.

For a comprehensive look at partnerships, see our publication  Guide to Starting a Business in Minnesota. Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the book covers the major issues, questions and concerns about business startups.