Delaware is highly recognized as a business-friendly state. It’s easy to start a sole proprietor business here, but before you pick a place to set up shop in The First State, you need to know about all their rules regarding sole props.
Delaware is like all states in that it establishes its own business laws and regulations. You need to be aware of them before you start a sole prop. We’ve created a guide to help you.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business with a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This business entity is the simplest type of business that one can form, and many people who freelance or sell goods are operating as a sole proprietor without realizing it. Because there is no separation between the business and the small business owner, the owner is personally responsible for the business’s debts and litigation that the business is named in.
Who is a sole proprietorship best for?
By definition, a sole proprietorship is a business with a single owner. Anyone looking to form a partnership or have multiple owners should choose a different structure. A sole proprietorship will be a good fit for someone looking to maintain total ownership of their business who is willing to take on the liability associated.
Because a sole proprietorship is simple to start and requires no fees or paperwork, it can be a good option for anyone who needs to get a business up and running quickly. It can also offer a good test case for a business idea without any upfront requirements.
It can be more difficult to get funding and credit in a sole proprietorship, so if investments are required, having capital at the start can make this structure easier.
How to set up a sole proprietorship in Delaware
1. Choose your business name
Delaware law allows you to operate a sole proprietorship under a name other than your own. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Delaware Secretary of State website to see if the name you chose is taken or if something similar exists.
In Delaware, a business name must not:
- Match any other business name in the state
- Be misleading
- Use any certain government agency terms or abbreviations like FBI or EPA
2. File a trade name
Delaware is one of the states that doesn’t have a state filing system for registering a trade or doing-business-as (DBA) name. Filing a trade or fictitious name is done at the county level.
You file for a trade name at the county level by submitting a form called the Registration of Trade, Business & Fictitious Name Certificate. You submit it to the county clerk’s office in the county where the business is located or you can mail it in to the clerk.
All forms must be notarized. There is a fee of $25 for each county where the business operates. Each county may have different fees and response times to register the name.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your business, you may need to obtain a variety of business licenses or permits. This is managed by the Delaware Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
You should also explore local regulations like building permits and zoning clearances where appropriate.
Many occupations are required to have a professional license in Delaware even if you are operating as a sole prop, some of which include: Chiropractors, nail technicians, and athletic trainers.
Go to the state website on professional licensing to see if you need a license to operate and how to apply for one.
Additionally, local cities and counties may require business licenses to do any type of sole prop or other business. There could be zoning issues as well, especially if you are running a business out of your home or are converting space into an office, clinic, or other business settings. You will need to check with the local municipality where you live to see what applies.
4. Obtain an Employer Identification Number (EIN)
If you’re planning a new hire, you need to obtain an EIN. This nine-digit number is issued by the IRS and used for tax purposes when you need to report wages. You can file for an EIN online through the IRS website.
If you do not have employees, you can use your Social Security Number to make tax payments and are not required to have an EIN. However, some banks will require new business owners to have an EIN to open a business bank account, so you may want one anyway.
Next steps
Once you have these pieces in place, your business is ready to operate! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
Anyone who does work on a freelance basis can technically be considered a sole proprietor of their business. They will pay taxes individually and usually operate under their own name, assuming liability associated with their work. However, there are a number of ways the two can differ.
A sole proprietor is able to hire employees and is responsible for employment taxes, while an independent contractor usually cannot do this without filing paperwork and effectively becoming a sole proprietor. Freelancers also do not have to adhere to the same local regulations that a business might and cannot purchase the same types of insurance. A freelancer is considered somebody who has a relationship with external clients, while a sole proprietorship operates as a small business.
In contrast, an LLC is another possible business structure for small businesses. An LLC, or limited liability company, must file articles of organization and register with their state. This also protects the owner (or owners, as an LLC can have multiple) from personal liability, and the business is treated separately for tax purposes. Because of this separation, LLCs are often given larger lines of credit or more likely to attract future investments in times of growth.
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What are the advantages of a sole proprietorship?
Fast and inexpensive startup
Unlike other business structures, a sole proprietorship does not have to register with the state or pay the associated fees. If a fictitious name is being used, there may be a registration process for the trade name, but it is optional. This lack of paperwork and cost means that you can start a sole proprietorship almost immediately and without bureaucracy.
Tax benefits
In a sole proprietorship, all profits and losses for the business are included in the owner’s individual tax returns. This leaves the owner responsible for state, local, and federal taxes that include their business, but they are not subject to corporate tax rates or specific business taxes. Additionally, being self-employed offers tax credits and benefits to the owner.
Complete control over your business
The sole proprietor of a business has complete control and is responsible for all decision-making within the business. With no partners or shareholders, you are free to run your business as you choose and take risks without implicating others.
What are the cons of a sole proprietorship?
Personal liability
Because the owner and the business are the same in a sole proprietorship, it can leave the owner vulnerable in multiple ways. Any business debts are also considered a personal debt, and any lawsuits against the business also implicate the owner. If these result in collections or seizures, the owner’s personal property can be taken in order to meet the obligations of the business.
Difficulty with funding
If a sole proprietor wants to raise capital, they may have fewer options to do so. Without stock in the business to sell, investors are less likely to get involved. Banks may also be less inclined to offer credit because the owner will be responsible for the business loans in the end.
Risks of hiring employees
As long as they have a valid Employer Identification Number, a sole proprietor is able to hire employees as needed. However, if any legal issues arise related to an employee, it could put a strain on the owner as their personal assets are on the line for lawsuits and other costs.
How are sole proprietors taxed in Delaware?
Income taxes
With this form of business, taxes are a part of the personal tax return of each owner. Business profit is calculated and reported on a Schedule C form which is for Profit or Loss from Small Business.
A Schedule C will calculate the income of the business, including all income and expenses, along with the costs of goods sold and costs for home-based businesses. The rest of the calculation is the net income, which is the amount of taxable business income.
This net income is entered on the Schedule C and included with other income and losses the owner (and their spouse) report on their income tax return.
The owner then pays personal income tax on all of the income, including income from business activity at the applicable rate for the year.
Delaware has a low, graduated income tax system. Tax percentages start at 2.2% and rise to 5.5% for those making less than $60,000. The top rate is 6.6% and it applies to those making more than $60,000.
Other taxes
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietorship must pay Social Security and Medicare taxes. If the business operates at a loss, the tax is not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and property taxes that are applicable.
One of the great things about Delaware is there is no sales tax. However, a gross receipts tax is applied to those selling goods and services. You will also be responsible for paying property tax on any building the business owns. Delaware has one of the lowest property tax rates in the country at just .56%.
FAQs
Delaware does require all businesses, including those running a sole proprietorship, to have a general business license obtained through the state. You may also be required to have local business licenses and permits.
The State of Delaware considers a small business to be fewer than 500 employees.
No, the state doesn’t require a seller’s permit as it doesn’t have any sales tax.
Anyone who has a business in Delaware must pay a gross receipts tax. Sellers of all goods, either tangible or otherwise, or service providers in the state must pay the tax.
No, the state doesn’t have resale certificates because it doesn’t impose a sales and use tax.
Delaware has several tax advantages for any kind of business. It has no value-added taxes, doesn’t impose a tax on business transactions and doesn’t have a sales and use tax. Additionally, there are no inheritance taxes in Delaware and it doesn’t have any capital shares or stock transfer taxes.
Delaware is the number one state in the country for attracting corporations. That is largely due to its tax advantages, which sole props can use also.
Although the state doesn’t have a registry of trade names, it requires all sole proprietors to register their names with the county where the business is located. You can’t do business prior to registration.
You file a Termination Affidavit Form with each county office where you registered. There is no fee to terminate a business.
Yes, a trade name or a fictitious name are the same things. If you plan to call your business by its own name, rather than operate it under your legal name, you can select a trade name and register it with your county.
Since the state doesn’t have a registration list on the Secretary of State’s website, you must search names on the Delaware’s judiciary website. It has every DBA registered in the state.
You will need to file forms with each county where you registered your original trade name. You may need to terminate the old trade name and re-register under the new name.
