Sole proprietorships are the easiest form of business structure to get into simply because there is not much to do. Decide to start doing business, pick a name for your business, register the name, obtain any licenses needed and open your doors. It is even possible to own a sole proprietorship without realizing you have one. If you earn money on the side by selling Avon at work or knicknacks to the neighbors you are a sole proprietor.

Learn the lingo of sole proprietorships so you understand what it means to be self employed or to be an independent contractor. Find out the meanings of these and other sole proprietorship key terms.

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DBA

DBA, or 'doing business as,' is a term referring to a fictious name that a person calls his company. For example, if John Jones goes into the landscaping business and picks 'Greener Yards' for his business name, he is known as John Jones, DBA Greener Yards.

I recommend: LegalZoom offers an overview of the requirements for DBA and can assist in showing you how to obtain your DBA.

EIN

EIN, or 'employer identification number,' is the number you must obtain from the IRS if you have employees for your sole proprietorship. You do not need an EIN if you work the business alone. Your social security number doubles for your identification number when you are the only person working your business.

I recommend: Nolo provides more information on obtaining an employer identification number if and when you decide to hire employees.

Independent contractor

Independent contractor, also known as an entrepreneur, is another term referring to a person who is self-employed but is contracting with another company to work. Good examples are construction companies that contract with companies to build for them.

I recommend: Internal Revenue Service provides information to determine if you are an independent contractor or an employee.

Unlimited liability

Unlimited liability refers to the fact that a sole proprietorship business is not a separate entity from its owner. As such, any money it makes belongs to the person, and any debt it incurs is the owner's debt. If the business should fail, the owner would have to pay off debts with his or her own money. If a catastrophic accident happened, the owner would be completely liable for all injuries.

I recommend: Flat World Knowledge provides information on unlimited liability and what you can do to alleviate it.

Self Employment Tax

Self employment tax reported on IRS form SE is the tax a sole proprietorship owner has to pay. He or she does not have to pay unemployment tax, but he or she does have to fill out the schedule SE, calculate the tax on his or her profit, and pay this to the IRS with his or her yearly taxes.

I recommend: Tool Kit offers download of schedule SE, along with brief instructions how to fill out the form.

Schedule C

Schedule C is the IRS form a sole proprietor uses to report business income or loss. He or she fills this out completely and pays taxes on the net profit the business made that year.

I recommend: Save Wealth Tax Time offers 2008 and previous year's schedule C, with instructions, for download.

If you have a great business idea in mind and would like to let the world know about it, a sole proprietorship could be for you. This type of business structure is the simplest and most popular type, and involves only you and your idea. Sole proprietors and their company are treated as one and the same under the law, and there are many advantages. A sole proprietorship gives you complete control over your company, tax-free savings and a simple, inexpensive way to run a business. This structure is best for companies that have little risk involved, as you are fully liable for any accidents or losses incurred by your company. This means that if sued, both your business and personal assets can be taken away. Of course, some types of products or services inherently have less risk than others, which you should consider before forming this type of business.

If a sole proprietorship sounds like it would suit you, there are just a few steps you will need to take before acquiring this title for your company. Sole proprietorships require you to do the following:

1. Decide on a name for your company.

2. Find out state and local laws to decide whether you need special permits or licenses.

3. Obtain an EIN if your sole proprietorship will include employees.

Action Steps
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Choose a business name for your sole proprietorship

Once you have your business idea, it is time to pick a name for your company. You can either use your name or make up a trade name. If you do decide to create a company name that is significantly different from your own, you will need to file your DBA, which is short for 'doing business as,' certificate with the appropriate public office. This step allows you to open a bank account and perform business transactions under your trade name. You can obtain a DBA by visiting your county recorder's office, or by using a business online to file.

I recommend: LegalZoom will help you prepare your DBA application should you choose to use a trade name. SimpleFilings provides a simple application for you to fill out in order to obtain your DBA.

Investigate possible licenses and permits needed for sole proprietorships in your state

Your state and local laws might require you to acquire a business license or a business sales tax license or permit, so be sure to check out your local laws before your business is up and running. Check with your county clerk if you are have any questions about local licenses and permits.

I recommend: The U.S. Small Business Administration website lists possible permits you might need when starting your business. Business.gov provides resources to find possible licensing and permit requirements in your city or state. Simply plug in your zip code to find out if your sole proprietorship requires special permits or licenses.

Acquire an EIN if you decide to add employees to your sole proprietorship

Whether you want to add employees upon start-up, or choose to add them later, you will first need an employer identification number, or EIN. This is necessary for taxing purposes when it comes to paying your employees.

I recommend: FindLaw provides a checklist to decide if you need an EIN. If you do, the IRS makes getting an EIN easy with an online application.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  If your want to add your spouse to your business, you can still remain a sole proprietorship. However, any other partner you want to add will require you to change your business structure.