Features
Part of Sole proprietorships: what the experienced already know
Sole proprietorships metrics: what you can and cannot check
Sole proprietorships metrics are conditions, not numbers: what you can check in your records, permissions, cover and exposure, and what cannot be measured.
Nothing about a sole proprietorship can be measured against a registry, because there is no registry entry. That removes the easiest check and leaves the ones that actually matter, which are about whether the business is distinguishable from you in the ways that count.
Below are the sole proprietorships metrics that are actually available, plus an honest note about the three things people try to measure here that cannot be measured at all.
What to take away
- The available checks are about records, permissions, cover and exposure. There is no status field to read.
- Each check has a source outside your own memorya bank statement, an issuing authority, a policy document, a contract.
- The single most useful number is not a number. It is the largest loss the business could cause, written down and compared with what you could absorb.
- None of these checks says whether you should form something. That remains a judgment for a lawyer and an accountant on your facts.
What can be checked
| Check | Where you verify it | Passes when |
|---|---|---|
| Money is separate in practice | Bank statements | No personal transaction in the business account this year, or each one noted |
| Books are current | Your records | You could produce last month's figures today, without reconstruction |
| The name is consistent | Invoices, account, any filing, website | All four say the same thing, spelt the same way |
| Name filing made where required | The office that holds it | A filed record exists, or a written note of why none is needed |
| Licenses held | Each issuing authority | Every one identified is current and in the right name |
| State tax registrations | Your state's tax authority | Each registration that applies exists and is live |
| Federal identifier position settled | Your own file | Either you hold one, or there is a note of why none is needed |
| Cover matches the work | The policy schedule | The exclusions have been read, by you, since the work last changed |
| Contract terms address failure | Your standard contract | It states what you are responsible for and to what limit |
| Records retrievable | A spot check | Pick one invoice from a year ago and find it in five minutes |
Ten checks, each verifiable against something outside your head. The last one is the fastest to run and the most revealing.
Ten checks for sole proprietors
- Money separatebank statements, no personal transactions
- Books currentlast month's figures today
- Name consistentinvoices, account, filing, website
- Name filingrecord exists or note why not
- Licensescurrent and in right name
- Tax registrationseach applicable one live
- Federal identifierheld or note why not
- Records retrievablefind old invoice in five minutes
The exposure number
Write down the largest realistic loss this business could cause to somebody else. Not the worst imaginable, the worst realistic. Then write down what you could absorb personally without the household being affected.
Exposure vs what you can absorb
Largest realistic loss
- Definition
- Worst realistic, not imaginable
- If larger
- Gap is what insurance is for
- Who closes it
- An insurer, not a filing office
- When to redo
- Whenever work changes shape
What you could absorb
- Definition
- Without household affected
- If larger
- No gap, no live problem
- Who closes it
- No action needed
- When to redo
- Whenever work changes shape
If the first number is larger than the second, the gap is what insurance is for: general liability for injuries and property damage, professional liability or errors and omissions cover for advice and services. Closing it is a conversation with an insurer, not a filing office.
This calculation does the most work in deciding whether the absence of a separation is a live problem. Redo it whenever the work changes shape. General reasoning on when the structural answer changes is in when to stop being one.
Three things that cannot be measured
- How protected you are. There is no separation, so the honest measure is zero, and everything else is insurance and contract terms.
- Whether the business is "real". People reach for a filing or a federal tax ID as proof of this, and neither confers it. The federal tax ID is an EIN, requested from the IRS on Form SS-4, and it is an identifier rather than a license or a registration; what it does is set out in the EIN explained.
- Whether you should have formed something. That is a judgment about facts, and the comparison behind it is in weighing the forms.
Running the check
Once a quarter for the money and records rows, once a year for everything else, and immediately after any change in what you do or where you do it. The IRS's guidance on keeping records sets the federal expectation for several of the rows above, and the return side lands on Schedule C, where profit and loss is reported, and Schedule SE, where self-employment tax is figured.
How often to run the check
- QuarterlyMoney and records rows
- YearlyEverything else
- After any changeWhat you do or where
- Every runDate the check
Date the check when you run it. The value of the whole exercise is comparison against last time, and an undated list gives you nothing to compare.
When a row fails
Most failures are small and specific: a license or a seller's permit still in the old name, a state withholding account left open, a policy whose exclusions were never read, an account with three personal transactions in it. Fix the specific thing, with the office that issued the record — a state licensing board, a city or county license office, or the state department of revenue for a sales tax permit or a withholding account.
Two failures deserve more attention.
If the exposure number is far larger than you could absorb, that is not a records problem, and it does not wait for the annual review.
If the name is inconsistent across four places, something will arrive addressed to a business that does not appear to exist. That is the problem in name filings explained: a DBA, also called a fictitious name or trade name, is filed with the Secretary of State or a county clerk depending on the state.
Common questions
Is there a benchmark for any of this?
No, and there could not be. These are conditions, not measurements, and a benchmark drawn from other businesses would tell you nothing about your exposures.
How long does the full check take?
Half an hour once the sources are in one place. The first run is longer because collecting the sources is most of the work, and that collection is itself worth having.
What if I do not know whether a license applies to me?
Ask the agency that issues it rather than reasoning it out — a state licensing board, a city or county office, or the state department of revenue for a seller's permit or a withholding account. An unanswered question in that row is the row failing, and it is the kind of thing that stays unanswered for years by default.
Should I keep this if I later form an entity?
The money, records and name rows carry over almost unchanged. The rest gets replaced by a longer list, because an entity such as an LLC adds a registry record and recurring filings to keep true.
What does a failed row cost me?
Usually nothing, until the day it does. That is precisely why it is worth checking on a schedule rather than when something goes wrong.
