When it comes to the different types of business entities to establish a business in the state of Missouri, a sole proprietorship is the easiest and least expensive way to go.
Here we will uncover the basics of the sole proprietorship, advantages and disadvantages, and the registration process.
What is a sole proprietorship?
A sole proprietor is simply an individual who owns an unincorporated business.
What are the advantages of a sole proprietorship?
The sole proprietorship is the easiest, fastest, and least expensive business entity to form because there is nothing to register as the individual and business are legally the same. The one registration that may be needed for a sole proprietorship is a fictitious name, which allows the use of a name that is different from the owner’s name.
Since you don’t need to create, incorporate and register a separate legal entity, you can start with less paperwork and fees to get moving faster.
While entities like the corporation and limited liability company (LLC) offer additional liability protection over the sole proprietorship, many small businesses without employees will choose the sole proprietorship for simplicity and cost.
What are the disadvantages of a sole proprietorship?
Being a sole proprietorship means that you are personally responsible for all debts, losses, and liabilities of the business. Being personally responsible means that if there is a lawsuit, the owner may have to use their personal assets to keep the business open.
A corporation or LLC can handle a lawsuit better as the business is separate from its owners, which also means the owners’ personal assets are safe from lawsuits (assuming the owners of the owners are safe from lawsuits (assuming the owner isn’t personally negligent). Also, if a corporation or LLC goes bankrupt, the owners can start other businesses, but when a sole owner has to go bankrupt to deal with business losses, the owner is personally liable.
Does a sole proprietorship have to register its name?
A sole proprietorship business can operate with the same full first and last name as the owner as many consultants, self-contractors do, or you can have a different name for the business, which is referred to as a DBA (Doing Business As), Fictitious Name, Trade Name, or Assumed Business Name. Before using a fictitious name in many states, it will need to be registered first.
How do you register a fictitious business name in Missouri?
A business operating under a name that is different from the owner’s full first and last name will need to register the name with the Missouri Secretary of State by completing the Fictitious Name Registration and paying a small filing fee.
Registering for a fictitious name does not protect anyone else from using it. To protect the name, a trademark can be registered with the U.S. Patent & Trademark Office (USPTO). Of course, this name has to be original since another business cannot already use it.
What business licenses and registrations may be needed?
Below is a brief list of some of the more common licenses, permits, and registrations that may be needed. These will vary by location and industry and would be required regardless of the business entity. To learn more, see our article on what business licenses are required in Missouri.
Business license. There isn’t a statewide business license, however, many cities require one. The need for a local business license will vary by industry and town in Missouri.
Professional Licensing. A professional license is licensing from the state that allows an individual to offer certain services such as accountants, hairstylists, HVAC contractors, tattoo artists, and more.
Federal Employer Identification Number. A Federal Employer Identification Number (referred to as a FEIN or EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS). A FEIN will only be needed if the sole proprietorship hires employees. Otherwise, the owner can simply use their social security number.
Business Tax Registration. The Missouri Tax Registration, commonly referred to as a sales tax number is needed when a business makes retail sales or has employees.
Sales Tax Exemption Certificate. Businesses that purchase inventory that is resold can buy this inventory free of sales tax. To do so, merchants will want to obtain a Missouri Sales Tax Exemption Certificate from the Missouri Department of Revenue.
Business Bank Account. Even though the individual and business are the same legally, it’s recommended to get a separate account to better keep track of business expenses and revenue.
Can a sole proprietorship change to a different business entity?
Many new business owners start as a sole proprietorship, especially if there are no employees or starting the business on the side. The benefits of the low cost and ease of formation are major pros, allowing the owner to focus on other aspects of the company.
If you are planning to start a small business, you can quickly start as a sole proprietor and later on form a corporation or LLC to get the liability protection and tax benefits. There are a few accounting hoops to jump through, but these are pretty minimal, considering the benefits these entities will provide.