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Sole Proprietorship in Illinois
A Sole Proprietorship in Illinois is an informal business structure owned by one person.
And the business owner is called the Sole Proprietor.
Sole Proprietorships are often the easiest and simplest form of business structure to create. However, that doesn’t always mean they are the best choice for small business owners.
While Sole Proprietorships have some advantages, there are also disadvantages you should be aware of.
We explain the pros and cons below, and provide step-by-step instructions if you decide to start a Sole Proprietorship in Illinois.
Pro tip: Sole Proprietorships don’t protect your personal assets. On the other hand, if you form an LLC, your personal assets are protected in the event of a lawsuit. Check out Sole Proprietorship vs LLC for more information.
What are the advantages of a Sole Proprietorship?
Ease of setup and maintenance
The primary advantage of a Sole Proprietorship is how easy they are to set up and to maintain.
In fact, there is no form to file in order to “create” one. If you’re doing business by yourself, you’re already operating as a Sole Proprietorship.
Think of it this way: once you engage in business activities with the goal of eventually making money, you are operating as a Sole Proprietorship. And you are a Sole Proprietor.
For example, Teddy wants to start a wedding planning business. The moment Teddy begins doing business research, calling potential customers, or building a website for that business, the state considers Teddy to be operating a Sole Proprietorship.
Taxation
The second advantage of a Sole Proprietorship is taxation. Filing business taxes for a Sole Proprietorship business is very similar to how you already file your individual taxes.
Meaning, you already file a personal Form 1040 tax return each year. However, as a Sole Proprietorship you (or your accountant) will include a Schedule C which lists your business profits or losses.
What are the disadvantages of a Sole Proprietorship?
There is 1 major disadvantage and a few minor disadvantages of a Sole Proprietorship.
No liability protection
The main disadvantage of a Sole Proprietorship is liability protection for your personal assets (like your home, cars, and bank account): there is none.
If your business is sued, your personal and business assets could be used to settle the business’s debts and liabilities.
On the other hand, if you formed an LLC or a Corporation, your personal assets are protected in the event of a lawsuit. Only the business’s assets can be used.
Tip: LLCs offer additional asset protection that Corporations don’t.
Lack of credibility
Even though you can file a DBA name (discussed below), Sole Proprietors are still often seen as being less credible.
On the other hand, if you were to form a legal business entity, like an LLC or Corporation, those are considered more official and reputable.
Converting from a Sole Proprietorship to an LLC
If you start your Illinois business as a Sole Proprietorship, and later want to convert to an LLC or Corporation, it can be a headache with many steps.
There isn’t a one-step process to convert a Sole Proprietorship to LLC. In fact, there are often multiple steps and multiple filings you must make with various state departments and local governments.
For example, if you want to convert your Sole Proprietorship to an LLC, you need to update the state, the IRS, and the bank that your business type has changed. And if your business requires a license or permit to operate, you will need to re-apply for those as the new business. You may also need to redo contracts with your clients and vendors, and update your website and marketing materials.
So if you’re on the fence about which type of Illinois business to choose, and you have the money to spend on an LLC, we recommend starting an LLC in Illinois.
Sole Proprietorship vs LLC
- Quick Read: What is an LLC and what does it do?
A Limited Liability Company (LLC) is a legal entity that offers pass-through taxation and asset protection. If your LLC is sued, your personal assets – like your home, car, and personal bank account – are protected.
An LLC with one owner is called a Single-Member LLC. And the great thing about them is they are taxed just the same as a Sole Proprietorship. Check out LLC taxed as Sole Proprietorship for more details.
To start an LLC in Illinois, you must file the Articles of Organization with the Secretary of State and pay a $150 filing fee.
LLCs must also pay an LLC annual fee and appoint a Registered Agent in order to stay in compliance.
If you want to hire a company to form your LLC, we recommend Northwest Registered Agent.
If you decide you’d rather operate as a Sole Proprietorship, we have the instructions below.
How to start an Illinois Sole Proprietorship
The only thing you must do to start a Sole Proprietorship in Illinois is simply decide to start.
Said another way, just by taking actions that may lead to making money means that you’re now a Sole Proprietor. You don’t have to file a document to “form” your Sole Proprietorship with the state.
However, there are a few things you may need to (or want to) do in order to operate legally.
For example, your business may need a license or permit to operate. You should also get an EIN Number (so you aren’t putting your social security number on invoices or contracts).
It’s also best practice to open a separate business bank account, and you may want to get a DBA for branding.
We’ll walk you through each of these steps below.
Step 1 – Business Planning Stage
Once you have a business idea and have decided to operate as a Sole Proprietor, it’s a good idea to consider some key components of the business.
Some things that are helpful to think about are your:
- business model
- business name
- startup costs
- industry
- marketing ideas
- business address
Your business model is how your Sole Proprietorship plans to make money – what will you sell, how it’s made, how it’s delivered, how it’s marketed or advertised, etc.
It’s a good idea to think of marketing ideas early on to help your business succeed. A good marketing plan can include developing a brand logo and business name, deciding where to advertise, building a website, and developing a social media strategy.
You should also choose a primary business address. This can be an actual office address, but it doesn’t have to be. It could be your home address or you could even rent a mailbox address. The purpose is to have one designated address where all mail for the business is sent, and that you can use on official documents.
Step 2 – Name your Sole Proprietorship and get a DBA
Now that you’ve done some business planning, you have the option to name your company.
By default, a Sole Proprietorship’s business name is the owner’s legal name. However, if you’d rather do business under a different business name, you can file a DBA name (Doing Business As name).
For example: Felipe Cruz is starting a wedding planning business. Instead of having to do business under his full name – Felipe Cruz – he’d like to do business under the business name “Excellence in Events”. In this case, he’ll need to register his DBA name “Excellence in Events”.
Having a DBA name can make it a lot easier to brand and market your business. It can also make your business sound larger than a one-person business.
Having said that, a DBA name is not required for a Sole Proprietorship in Illinois. If you’d rather do business under your first and last name, that is 100% okay.
However, Illinois requires you to register an Assumed Name if your Sole Proprietorship is using any name other than your first and last name. This rule is found in the Illinois Assumed Names Act.
Note: In Illinois, a DBA is technically called an Assumed Name, however, they mean the same thing.
How do I get a DBA in Illinois?
To register your DBA (aka Assumed Name) in Illinois, you’ll need to register the assumed name with the county clerk where your business operates.
Here is a List of County Clerks in Illinois.
Need to save time? We recommend hiring MyCompanyWorks ($99 + state fee) to file your DBA.
Step 3: Get an EIN from the IRS
By default, a Sole Proprietor uses their Social Security Number (SSN) for tax and financial reporting.
However, a Sole Proprietor also has the option of getting an EIN Number (Employer Identification Number) from the IRS.
An EIN is a number assigned to your business by the Internal Revenue Service (IRS).
The EIN identifies your business to the IRS, the same way a Social Security Number identifies a person. You could also think of the EIN as your “account number” with the IRS.
An EIN is also called a Federal Tax ID Number, Federal Employer Identification Number, or FEIN. They all mean the same thing
Using an EIN for your Sole Proprietorship won’t affect your taxes. You’ll still file your business taxes the same way whether you use your EIN or SSN for your Sole Proprietorship.
Getting an EIN for your Sole Proprietorship may be a good idea for a few reasons:
Safety (prevent identity theft)
By using your EIN, you don’t have to give out your SSN as much. Without an EIN, you may need to use your SSN when dealing with vendors and clients.
For example, if a client pays you more than $600 per year, you’ll need to give them IRS Form W-9.
Instead of using your SSN, you can list your EIN instead on Form W-9.
You can also use your EIN to apply to online account setups and other places you may do business.
Hiring employees
In this case, an EIN isn’t optional; it’s required. If you want to hire employees for your business, you will need to get an EIN first. This is because an EIN is required in order to pay payroll taxes for your employees.
Note: As a Sole Proprietor, while you are considered self-employed, you are technically not an employee. This means you aren’t required to get an EIN if you are the only person that works at your business. That said, we still recommend that you get one.
Step 4 – Research business license requirements
When researching required business licenses, it’s a good idea to check for state-level requirements.
The good news is that Illinois doesn’t require a “general” business license at the state-level for Sole Proprietors.
However, depending on your industry, and where you’re doing business, you may need an industry-specific license or a license issued by your municipality (ex: county or city).
Please see our Illinois Business Licenses and Permits page or the Illinois.gov Business Licenses page.
Most Illinois businesses must register with the Illinois Department of Revenue. Learn more in the Illinois Department of Revenue Registration Guide.
Tip: Save time by hiring an expert. We recommend using IncFile ($99) to handle the business license research for you.
Step 5 – Maintain your business
Once you have established your Sole Proprietorship, there are a more few things to do to make your business run smoothly:
- Get a business bank account
- Maintaining business financial records
- File taxes
Business Bank Account
Keeping business finances separate from personal finances is an important part of operating a business safely. That’s why it’s important to open a business bank account for your Sole Proprietorship.
Business bank accounts also typically allow you to process more transactions per month than a personal bank account, amongst other business benefits.
Some banks may require you to have a DBA in order to open a business bank account for a Sole Proprietor. We recommend calling the bank ahead of time to see if a DBA is required or if you can open the business account in your own name.
While you’re on the phone, it’s also a good idea to ask about the products they offer, and what documents they require.
For example, most banks require you to bring your photo ID, as well as your EIN Confirmation Letter and DBA filing if you have an EIN or DBA).
Business Records
Most states require that businesses keep certain records. There is no law specifically governing Sole Proprietorships, however, it’s a good idea to keep the following records for your Sole Proprietorship:
- Copies of tax returns for the previous 3 years
- Copies of any financial statements for the previous 3 years
If you’re just starting out, you won’t have these records right away, and that’s okay. Just save and organize them as you do business.
We recommend establishing a specific location to store the records.
For example, a filing cabinet in your house or at the business’s office location will work fine. So will an online cloud storage system where you scan and save all of your business documents.
File your taxes (or hire an accountant)
As mentioned above, when operating as a Sole Proprietor, you’ll report your business profits or losses on your personal tax returns.
While you can file your personal tax return yourself (using a software like Turbotax), you may want to hire a professional to maximize your business tax credits and deductions.
If you’d like to hire a business accountant, we’ve made a list of Business Accountant Recommendations for all 50 states.
Conclusion
While a Sole Proprietorship may seem easier and less expensive than starting a formal business entity (like an LLC), it can be risky. Sole Proprietorships don’t offer asset protection, and you’ll likely still have to file paperwork for a DBA name and business license or permit.
In general, we don’t see many good reasons to operate a business as a Sole Proprietorship, and we don’t recommend it. Sole Proprietorships don’t have any advantages over legal entities.
Instead, we recommend starting an LLC in Illinois.
Note: The exception to this would be if you really don’t have money to pay for an LLC, especially if your state has expensive fees. For some, a Sole Proprietorship may be the only option for getting your business off the ground and earning profits. In this scenario, a Sole Proprietorship can be a good place to start.
If you’d like to learn more about LLCs, check out our step-by-step guide on starting an LLC in Illinois.
Illinois Sole Proprietorship FAQs
What is better – LLC or Sole Proprietorship?
While starting a Sole Proprietorship is easy, the advantages end there.
Sole Proprietorships offer no personal asset protection. If your business is sued, you’re personally liable for the business debts and obligations. On the other hand, if you form an LLC, your personal assets are protected if your business is sued.
Sole Proprietors are also seen as less official and less legitimate than a formal entity like an LLC.
We recommend forming an LLC instead of a Sole Proprietorship. LLCs offer personal asset protection, are more credible, and there’s no difference between how you file taxes on business income for a Sole Proprietorship versus an LLC.
How do I make myself a Sole Proprietorship?
You don’t have to file any forms to start a Sole Proprietorship in Illinois. The state considers you to be a Sole Proprietor as soon as you engage in activities with the goal of making money.
However, Sole Proprietorships are required to conduct business under the business owner’s first and last name. Said another way, the business name of a Sole Proprietorship must be the first and last name of the business owner.
For example, if Leslie Turner has started selling leather goods at craft fairs and online, the state considers him to be a Sole Proprietor. This means that Leslie is required to sell leather goods under the name “Leslie Turner”.
If you’d like to do business under any business name that isn’t your first and last name, you’ll need to register a DBA (Doing Business As) Name.
For example, Leslie wants to start selling leather goods under the business name “Leslie’s Leathers”. Leslie will need to register “Leslie’s Leathers” as the DBA name for their Sole Proprietorship.
Are Sole Proprietorships required to register in Illinois?
No, Sole Proprietorships aren’t required to register with the Illinois Secretary of State. Your Sole Proprietorship simply exists once you decide to start a business and engage in business activities.
However, if your Sole Proprietorship will use any business name other than the owner’s first and last name, then you’ll need to register a DBA (aka Assumed Name) with the county clerk where your business operates.
Additionally, you should check with an accountant in Illinois about whether your Sole Proprietorship needs to register with the Illinois Department of Revenue for things like sales tax or other types of business income taxes.
Can a DBA be a Sole Proprietorship?
A DBA isn’t a Sole Proprietorship. A DBA is just a “nickname” for something else – whether that’s a business or person(s).
And the default name for a Sole Proprietorship is the first and last name of the owner (like: Bob Barkley).
Having said that, Sole Proprietors can do business using a DBA (doing business as) name.
For example, However, if you’re running a bagel shop, you can file a DBA called “Bob’s Bagels & Sandwiches” in order to better brand and market your business.
How are Sole Proprietorships taxed?
Any profit or loss from your business is reported on a Schedule C with the Internal Revenue Service (IRS).
And the Schedule C is included with the rest of your personal tax return (Form 1040).
What’s the difference between a Sole Proprietorship and a Partnership?
A Sole Proprietorship is an informal business structure with one owner.
A Partnership (aka General Partnership), is an informal business structure with two or more owners.
While both structures have pass-through taxation, a Partnership is required to also file Form 1065 at tax time, while a Sole Proprietorship isn’t required to file Form 1065. Instead, a Sole Proprietor needs to include a Schedule C on their personal Form 1040 tax return.
References
IRS: Sole Proprietorships
IRS: Income & Expenses
Illinois Small Business Guide
Illinois Secretary of State: Business Services
Illinois First Stop Business Information Center
Illinois Department of Financial and Professional Regulation
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
