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What is a sole proprietorship?

Starting a business is an exciting time but involves many complicated decisions. Deciding between the
different types of business entities of which to form your business is one of the earliest and most critical
decisions. Having a savvy business lawyer help with the entity formation will build the foundation
necessary for a legally sound and beneficial business structure.

What is a sole proprietorship?

Sole proprietorships are usually the simplest version of a business that a person can form. This is
because unlike a partnership, corporation, or limited liability company, a sole proprietorship is not
actually a legal entity distinct and apart from its owner. A single person owns 100% of the business
(called the “proprietor” or “owner”). As the sole owner, the proprietor manages all business operations.
Accordingly, the proprietor takes on 100% of all liabilities associated with running the business, including
its debts. As a result, the business and proprietor are considered the same entity for tax and legal
purposes.

What are the different types of sole proprietorships?

There are three primary categories of sole proprietorships. The categories differ depending on the
services offered and their relationship with customers.

  1. Self-Employment: These are proprietors who operate a business that provides goods and/or
    services to their clients. Businesses of all types can be sole proprietorships.
  2. Independent Contractor/Freelancer: Many businesses or individuals pay sole proprietors who
    use their own resources and direction to do work for others, such as photographers, but the
    worker is not on their payroll. This type of relationship is commonly referred to as
    “independent contract” or “freelance work.” Typically, the independent contractor will fill out
    an IRS form W-9 for whoever is paying for the work and file an IRS Form 1099 to claim this
    income.
  3. Franchise: In a franchise, the proprietor purchases the rights to a company’s brand. The
    proprietor is called the “franchisee,” and the branding company is called the “franchisor.” These
    agreements require the proprietor to operate the business under specific terms and models that
    are handed down by the franchisor. In exchange, the franchisee may receive significant
    assistance from the franchisor, such as marketing materials, training, equipment, software, and
    other assistance.

 

How to Properly Form a Sole Proprietorship

Technically, forming a sole proprietorship involves little to no overt actions by the owner because it is
not a distinct legal entity. However, using the following steps to set up the sole proprietorship provides
significant advantages for the owner:

  1. Choose a Business Name: In selecting your business name, you should search the Colorado
    Secretary of State’s website to ensure the proposed name is not already in use. In Colorado,
    your business name must not:
    • Match any other business name in the state;
    • Be misleading; or
    • Use any government agency terms or abbreviations.
  1.  File a Trade Name: While filing your business name is not required, it will help protect the business by not allowing others to use the same name. Anyone can file a trade name (“doing business as,” “d/b/a,” or “dba”) by going to the Colorado Secretary of State’s website and filing
    the proper forms.
  2. Obtain Any Required Licenses, Permits, or Zoning (if needed): Depending on the business’ industry, you may be required to receive specific statewide business licenses and/or permits. These are managed by varying state agencies, such as the Colorado Division of Professional Occupations, the Colorado Department of Regulatory Agencies, and other regulatory agencies. In addition to state licensures, some cities and counties will have their own business, permitting, and zoning requirements.
  3. Obtain an Employer Identification Number (EIN): If you do not have employees, you can use your Social Security Number to file taxes without having an EIN. An EIN is nine-digit EIN number the IRS issues for tax purposes. However, some banks will require new business owners to have an EIN to open a business bank account. You can apply for an EIN for free online through the IRS website by filing a SS-4 application.

Burnham Law was once in the same shoes as many of our small business clients. Burnham Law started
in the basement of a home with just a single employee and has grown to a multi-state award-winning
law firm with over 40 attorneys. Through sound advice, the business attorneys at Burnham Law can
help you grow your ideas into successful and profitable business, and help you achieve your business
goals.

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