There is a lot of confusion and misinformation and a lot of unknown information about operating as a Sole-proprietor (SP) that I want to clear up and share with you. There is nothing worse than learning a lesson the hard way.
What are these facts??
Whelp, here ya go:
📝You do not have to file any documents to become an SP. Nope. Now, by default, you are considered a SP if you do not register as an LLC (or another entity), but you will have to file some forms. These forms are dependent on what your state, city, and county ( or township, Provence if that is what your area is) require from SP's. This can be anything from a fictitious name certificate (DBA), business license, and/or a home occupation license.
📝There is no "up-keep" for a SP in terms of annual filings/fees. Some do require you to renew any licenses they require of you. It can range from annually to every 5 years.
📝If you will be operating under your full legal name only you typically do not have to file a fictitious name certificate (DBA). (Ex. Poppy Jane)
📝If you add any word to your name you do have to file a fictitious name certificate (DBA). (Ex. Poppy Jane Works)
👩⚖️A SP is not a legal entity. It is fully legal to operate as a SP, but you and your business are one and the same. There is no legal distinction between the two, therefore a SP is not considered a legal entity. (Entities are LLCs, Corporations, Partnerships, etc)
👩⚖️You do not legally own your business name (if you're not using only your full legal name). A fictitious name (DBA) is just that, fictitious, fake.
👩⚖️If you trademark your business name but do not become an LLC, or other entity with your state anyone can incorporate it in your state with that same business name. When you register with the state as an entity, the state does not search the trademark database when someone registers their business.
👩⚖️You can challenge that business should that happen since you own the trademark, but you do have to do your own due diligence in checking those types of things. (This does apply for anyone who trademarks anything - it's your responsibility to stay on top of that.)
💰98% of the time trademarking your name will cost you 10x more than becoming an LLC. Trademarking is always a great idea, but you can get your business name protected quicker and cheaper by incorporating with your state first.
😳 A SP does not give you any legal protection. I.e. if a client or non-client sues you each can go after both your personal and business assets. Yup, I said non-client. So even if you are in a low-risk industry, you are still operating with a very high risk in general. This is probably one of the top 5 unknown facts.
😳 Don't have assets? They can be awarded a wage garnishment and/or a lien. Meaning all future income/assets will go directly to them. If they are awarded a garnishment they can garnish any amount of money currently in any bank account you sign on (business and personal accounts). $1, $500, $7,000 -- What do I mean by any bank account you sign on? If you are a signer on your son's account, niece's account, parent's account, etc they can garnish those accounts. Even if you don't use them but you are on the account in case of an emergency or something like that. So if your niece is a super saver or just had their loan for school deposited, boom, gone. Rent due next week, too bad. Another top 5 unknown facts about SPs. Oh - you don't get prior notification of this either. The moment the bank gets the court order they have to pull that money and send it to that person and then send you a notification via certified mail afterward.
💰If you need/want to file bankruptcy personally or for the business, you have to file for both. You cannot do one or the other in most circumstances.
💰If you apply for a business loan, it will be based on your personal credit, personal ability to repay the loan, your personal debt to income ratio, credit payment history, etc. If you are approved but end up defaulting on the loan, the above legal situations apply.
Phew. That was a lot, wasn't it? Now, there are absolutely situations where it makes sense to be a SP, but this decision should certainly not be taken lightly. But, the good thing is you can always become an LLC at any time. Nothing is set in stone. But my job and my priority are to give you all of the good, bad, unknown, and just plain super shitty facts. After all, I assume your business is your dream, your passion, your way to be at home with your family, not have to work for "the man", change your family tree, and countless other reasons. There are zero reasons to "risk it" if you don't have to.
And the LLC upkeep is not as bad as most make them out to be. The filing fees are not insanely expensive in most states. In NM it's $50, CA is $90, PA is $125 (The SP filing fee in PA is $75, so you might as well become an LLC in PA), GA is $100 and on and on. A lot of states do not require any annual filings or fees from you either.
As always, please let me know what questions I can answer for you. Leave a comment or you can schedule a complimentary consultation.
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This is not legal advice, informational only. This blog does it constitute a