Getting Started with a Trade Name or Sole Proprietorship

CHOOSING A BUSINESS FORM

Often, the first choice after deciding to start a business is deciding whether to operate the business individually or in the form of a "business entity." We are all familiar with certain types of business entities such as a corporation or partnership, but there are other types of business entities with names like "limited liability companies", "close corporations", and "limited liability partnerships". Surprisingly, one of the simplest ways to start a business is without forming a business entity. A person can always do business under his or her own name, or even a trade name, as a "sole proprietor." No matter what you do, the form you choose will have legal and tax implications which you must understand before you begin your business. While this guide can help educate you about some of the issues involved, it is always wise to have professional advice before you open the door to customers.

DOING BUSINESS AS A SOLE PROPRIETORSHIP
UNDER ONE'S OWN NAME AND UNDER A TRADE NAME

When a person decides to start a business, goes out and picks a location, and opens the door to customers, that person is operating as a sole proprietor. Basically, this means that the person owns all the assets of the business, and is personally liable for all the debts of the business. A sole proprietorship is not a separate taxable entity, but rather income and expenses are accounted for in the person's own income tax return.

For example a business such as "Jane Smith, Building and Contracting" means that Jane Smith is in the building and contracting business. When she buys supplies on credit at a store, she is responsible for the debt. If she damages a customer's property while she is working, she could be held liable for the damage. When she gets paid by a customer, the customer is paying her for her work. These are all the simplest elements of doing business as a sole proprietor.

A variation on doing business as a sole proprietor under one's own name is doing business under a "trade name." A trade name is simply a name that a sole proprietor uses instead of his or her own name. For example, instead of "Jane Smith, Building and Contracting" it could be Jane Smith doing business as "Restoration Building and Contracting Services." All the tax and liability issues associated with doing business under one's own name are generally the same as doing business under a trade name. The only exception is that to do business under a trade name, a person must file a trade name registration with the Corporations Division of the Secretary of State's Office.

A trade name registration lets the public find out who is the real, live person that is doing business under the assumed name. If there was no filing with the Corporations Division, a customer, supplier, or creditor of "Restoration Building and Contracting Services" would have no way of knowing that they are actually doing business with Jane Smith. In addition, it is the Corporations Division's job to make sure that two businesses are not using the same name. Vermont law prohibits people from using any business name, including a trade name, that is the same as, deceptively similar to, or likely to be confused with or mistaken for the business name of any existing, validly registered corporation, partnership, association or trade name.

Registration of an Internet ".com" name does not guarantee that you can register the same name with the Corporations Division. Any ".com" name must be available in Vermont before the Corporations Division can register the name. Likewise, registration with the Vermont Department of Taxes does not guarantee that you can register the same name with the Corporations Division.

THE TRADE NAME FORM

The trade name form is relatively straight-forward. Here are some important pointers about trade names:

After receiving your application, the Corporations Division reviews it for form. The application will be denied if the name is the same as, deceptively similar to, or likely to be confused with or mistaken for the business name of any existing, validly registered corporation, partnership or association. Do not spend money on signs, stationery or other items until the Corporations Division approves your trade name application. To save time, your application can include two or three alternatives in case your first choice is denied.

A trade name may not include the words "Company," "Corporation," "Incorporated," or "Limited," or any abbreviation of these words, since these words imply that there is a corporation. While a corporation may operate under a trade name, its trade name cannot itself be a corporate name, that is, a name with a corporate ending.

Under the common law, a person claiming a pre-existing, established use of the name may challenge your right to register and use the name.

The application must include the notarized signature of the applicant. The law requires that the application be filed no later than 10 days after a business starts. The filing is good for a period of 5 years.

Remember, whether you do business under your own name or a trade name, a sole proprietorship means that you are the sole owner, with all the responsibilities and liabilities that go along with a business. While a sole proprietorship is simple, it is not necessarily the best way to operate a business. Sometimes it makes sense to form a business entity for liability, business, or tax reasons. If, at some future time, you decide to create a different business type - such as an LLC - you will be required to cease the trade name by filing the cessation form before the new entity can be created.