Sole prop | Chamber of Commerce https://www.chamberofcommerce.org Wed, 26 Jul 2023 11:55:15 +0000 en-US hourly 1 https://wordpress.org/?v=6.1.1 https://www.chamberofcommerce.org/wp-content/uploads/2023/06/cropped-display-photo-1-32x32.jpg Sole prop | Chamber of Commerce https://www.chamberofcommerce.org 32 32 How to Start a Sole Proprietorship in Colorado https://www.chamberofcommerce.org/sole-proprietorship/colorado Sat, 04 Jun 2022 02:07:04 +0000 https://www.chamberofcommerce.org/?p=23431 Colorado has mountains, lakes, skiing, and all kinds of hiking. It also has business opportunities for those seeking to start their own company. Colorado is like every other state in that it has its own tax rates and rules for those wanting to start sole proprietorships.  You need to be prepared to address all those […]

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Colorado has mountains, lakes, skiing, and all kinds of hiking. It also has business opportunities for those seeking to start their own company. Colorado is like every other state in that it has its own tax rates and rules for those wanting to start sole proprietorships. 

You need to be prepared to address all those unique aspects if you want to start a sole proprietorship in Colorado. We’ve prepared this guide to help you find your way through the state websites and also answer some questions about setting up this type of business in The Centennial State.

What is a sole proprietorship?

A sole proprietorship is a business structure in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a business that one can form, and many people who freelance or sell goods are operating as sole proprietors without realizing it. Because there is no separation between the business and the owner, the owner is personally responsible for all 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 Colorado

1. Choose your business name

Whether you set up shop in Denver or Aurora, Colorado 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 Colorado Secretary of State’s website to see if the name you chose is taken or if something similar exists. 

In Colorado, 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 

It isn’t required to register a trade name with the State of Colorado but doing so helps protect your name from others using it. Filing a trade name, or a doing-business-as (DBA) name begins with the Colorado Secretary of State’s corporate information website. That is where you download and fill out the necessary forms.

  • Find Trade Names link – Go to Trade Names under the LLC, Corporations, and Trade Names Section and click on the link.
  • File Individually – Click on the first link to file individually.
  • Fill out the form – You will see an online form where you put in your name, address, the date you want your trade name to become effective, and your email address. There are other items on the form to look at if you want to upload information. You will also put in the trade name you want and a brief description of your business.
  • Submit – Hit the submit button at the bottom and it will take you to a fee page. The fee is $20. It may take up to three weeks to hear back from the state.

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 Colorado 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. 

Although you don’t need a sole proprietorship license to do business in Colorado, you may need a professional or occupational license. A number of professions, such as counselors, require those. Go to the Colorado Professional Licensing website to see if your occupation needs a professional license. 

Local cities and counties will also have their own requirements for business licenses, permitting, and zoning. You will need to check the local municipality where your business is located to see what rules apply. There could be some zoning issues if you operate certain businesses out of your home.

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 file taxes 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 a freelancer 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, a limited liability company (LLC), is another business entity option for small startups. An LLC must file articles of organization and register with their state. It also offers the owner (or owners, as an LLC can have multiple) liability protection, 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 benefits 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. The business can simply be run under your legal name, or you can give it a fictitious name. If you opt for a fictitious business name, you can register it with the state, but it’s 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 Colorado business has complete control and is responsible for all decision-making within their 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 debts that the business owes are also considered 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 loans in the end. Even funding options through the Small Business Administration, or SBA, may be limited.  

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 Colorado?

Income taxes 

With this type 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) reports for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Colorado has a flat rate tax of 4.5%. A flat rate tax means everyone pays the same tax regardless of earned income. 

Additionally, voters in Colorado will be voting on a proposal on the Nov. 8, 2022 ballot to reduce the flat rate to 4.4%. 

Other taxes 

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. 

Colorado has a 2.9% sales tax and local governments are allowed to have a local option sales tax of up to 8% to pay for local projects. The average local tax rate collected is 4.09%.

Sole proprietors must also pay any other local taxes plus pay any property taxes on buildings they own to do business.

FAQs

No, Colorado doesn’t require you to register your business as a sole prop nor does it require you have a general business license. You do not need to select a registered agent either. However, local cities and counties may have that requirement.

It’s simple and easy to start and operate a sole proprietorship in Colorado, as it is in most all the states. You don’t have any of the legal requirements of a sole prop that you would have in an LLC or other business organization. 

It depends on the business you are in but general liability insurance is advised for most businesses to avoid assuming all liability yourself. 

Yes, you can open a business banking account with your DBA name. In fact, it’s advised to have a separate business account from a personal account for liability and tax accounting reasons. You may need to provide a statement of trade name, depending on the bank’s requirements. 

You will be required to report any sales from your sole proprietorship in Colorado. Generally, this is filed on your personal income tax returns. However, you are expected to pay taxes on sales to the Colorado Department of Revenue.

You only need an EIN number if you plan to hire employees, pay the wages and report all earnings on a W-2. 

Colorado doesn’t have any limitations on the business you start but there could be city and county limitations. You may need special licensing or a zoning approval for some businesses.

A use tax is a tax on property stored, used, or consumed at retail Property falling under the sales tax is exempt from any use tax.

You file a state tax return as an individual and include all profits made from the business in your earnings on the return, just as you do for the federal return.

Since your earnings are reported on the state income tax form, you are only taxed if you made a profit. Plus, expenses are deductible to reduce the amount you’re taxed on.

The post How to Start a Sole Proprietorship in Colorado first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Texas https://www.chamberofcommerce.org/sole-proprietorship/texas Sat, 04 Jun 2022 02:07:03 +0000 https://www.chamberofcommerce.org/?p=23448 Many Texas business owners choose to start a sole proprietorship, as it is the quickest and least expensive business structure available. While no formal paperwork is required, there are other regulations that need to be followed and decisions that may have legal implications when not undertaken with care. It is key to understand how sole […]

The post How to Start a Sole Proprietorship in Texas first appeared on Chamber of Commerce.

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Many Texas business owners choose to start a sole proprietorship, as it is the quickest and least expensive business structure available. While no formal paperwork is required, there are other regulations that need to be followed and decisions that may have legal implications when not undertaken with care. It is key to understand how sole proprietorships operate and what this means for you as the owner before you take any steps toward starting your business.

What is a sole proprietorship?

A sole proprietorship is a business entity that refers to a business that is unincorporated and has a single owner. This is the simplest possible structure to set up a business. While there can only be one owner, a sole proprietorship can have employees and obtain an Employer Identification Number (EIN). 

As a sole proprietor, your business profits are taxed as a part of your personal income. This makes the process simple, but can also expose you to personal liability in some cases. 

Who is a sole proprietorship best for?

A sole proprietorship makes sense if you:

  • Plan to start a business where only you are in charge and intend for that to be the case going forward. 
  • Want to call your business something other than your legal name. 
  • Plan to hire employees
  • Want to set up a business quickly

How to set up a sole proprietorship in Texas

1. Choose your business name

Texas 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 conduct a name search on the Texas Comptroller of Public Accounts database to see if the name you chose is taken or if something similar exists. 

In Texas, 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 

If your business name is different from your own name, Texas requires you to work with the country clerk where you plan to do business in order to use an assumed business name. This requirement is mandatory and requires you to obtain an Assumed Name Certificate from the relevant office and then mail it to the country clerk at the address listed on each application. There is a small fee, around $10, that varies by county. No action needs to be taken at the state level.

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 Texas 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. 

The only state level permit or professional license required by Texas is the seller’s permit or sales tax permit. Anyone engaged in business in Texas who plans to sell or lease tangible personal property or taxable services must obtain this license, including sole proprietorships. This permit can be obtained via the Texas Comptroller’s website. There is no filing fee to apply for a Texas sales tax permit and it does not need to be renewed. 

Certain professions and industries may require additional permits through the state. 

Depending on the location of your business and what industry you are in, you may need to obtain separate licensure on a local level. For example, the City of San Antonio requires anyone who sells items door-to-door or in a public space to obtain a Peddler’s License. 

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 file taxes 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?

A Texas LLC is a limited liability company that can be formed by one or multiple people. The primary difference in an LLC is that it is a separate legal entity from the owner. In other words, your business and your personal assets are separate. With an LLC, taxes are filed separately and business liability does not translate to the owner. 

Setting up a sole proprietorship is simpler than setting up an LLC because it does not have the same business tax implications.

If you’re freelancing, you might wonder if you need to set up a sole prop. If you plan to hire freelancers, then yes. To hire others, you need a business structure like a sole proprietorship. 

If you don’t plan to hire anyone, you can continue to freelance and pay taxes on the income without setting up a sole proprietorship. 

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What are the benefits of being a sole proprietor in Texas?

Simple way to start a business

Texas sole proprietorships are incredibly easy to set up and do not require any filing process or fees at the outset. In fact, if you have done any freelance work or made money through a side hustle, you are technically operating a sole proprietorship. The simple and inexpensive start means you can quickly legitimize any business you are doing by opening a bank account and distributing formal marketing materials. 

Your business remains yours

As the owner of a sole proprietorship, you have complete control of your business. Decisions will not need to take into account legal advice, shareholders, or partners, giving you the freedom to change your course or adjust as you learn about your business. 

Easy transition to a corporation

Starting a business as a sole proprietor does not mean you will have to operate that way through the life of your business. At any time, you can convert a business to an LLC, corporation, or general partnership with the right paperwork and process. This allows you to feel out your business and settle on a model before you move to a corporate structure. 

What are the cons of setting up a sole proprietorship?

No personal asset protection

In a sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. If the business has a financial obligation that can’t be met, your personal money and property can be used to meet that obligation.

Less access to funding

A sole proprietorship may not be given the same access to business accounts and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for sole proprietorships. You may also experience problems raising capital in the beginning since a sole proprietorship doesn’t carry the same credibility as an LLC or corporation. 

Harder to sell your business

If your business grows to a place where you are profitable and have others interested in taking ownership, being structured as a sole proprietorship can present challenges. You would be subject to capital gains tax as part of the transaction, and any buyer would also be assuming liability for debts. 

How are sole proprietors taxed in Texas?

Income taxes 

With this type 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 for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Texas does not have a state income tax, so no additional income tax is imposed beyond the federal amounts. 

Other taxes 

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. The property tax rate in Texas is an average of 1.69%, slightly higher than the national average.

Business taxes in Texas are some of the lowest in the country. Texas does not require sole proprietors to file or pay franchise taxes. However, any business with employees will have to pay unemployment taxes each year.

FAQs

Most businesses in Texas, including sole proprietorships, will require a sales tax permit. This is also known as a seller’s permit as it allows a business to sell products and services to the public and to collect sales tax on these goods. If you are a digital business but sell products within Texas, this will also be required.

Each business should have one assumed name or DBA, however, there is no limit to the number of businesses you can operate under an assumed name. Keep in mind that each one will require incremental expenses and paperwork that needs to be filed, renewed, and maintained. 

You can not use the words lotto or lottery, or any words that imply the company is organized for an unlawful purpose. You can also not use names that would confuse your business with a government agency or anything that implies you are working for the benefit of veterans or their families, such as “legion” or “world war.” Other words will be restricted based on the type of business you run. For example, you cannot use the word “Attorney” unless there is a licensed attorney at the helm.

In Texas, sales tax can be applied to any physical property, such as furniture or motor vehicles. Tax-exempt goods include groceries, gasoline, and non-prescription medication. Anything that is digital in nature does not have sales tax applied in Texas unless it is prewritten computer software being sold online. The Texas sales tax is levied at a rate of 6.25%.

Income taxes are done at the federal level and should be filed according to the regular schedule For state sales tax, the frequency of filing depends on the total amount of sales tax collected. If less than $83.33 is collected per month, annual filing is permitted. More than $1,500 per month means you should file monthly.

An EIN Is a business equivalent of a Social Security Number and is used by the IRS to track taxes. Because sole proprietorships are taxed under the owner’s personal taxes, an EIN is not required to operate or file taxes. However, it may be beneficial to have an EIN if you are planning to open a business bank account, obtain insurance, or seek outside funding.

Texas does not require paperwork to become a sole proprietor and no associated fee. If you want to operate under a name other than your own, you will need to file an Assumed Name application at the county clerk’s office and pay a small fee, but this is not required. 

The post How to Start a Sole Proprietorship in Texas first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in California https://www.chamberofcommerce.org/sole-proprietorship/california Sat, 04 Jun 2022 02:07:03 +0000 https://www.chamberofcommerce.org/?p=23456 California has a lot to offer business owners. You may be tempted to start a sole proprietorship right away, but you need to look at some of the state rules first. California has specific rules about how to file a trade name and its taxes vary from other states. Our guide below will help you […]

The post How to Start a Sole Proprietorship in California first appeared on Chamber of Commerce.

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California has a lot to offer business owners. You may be tempted to start a sole proprietorship right away, but you need to look at some of the state rules first.

California has specific rules about how to file a trade name and its taxes vary from other states. Our guide below will help you as you plan your sole proprietorship in The Golden State.

What is a sole proprietorship?

A sole proprietorship is a business entity in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a 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 owner, the owner is personally responsible for all 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 California

1. Choose your business name

California law allows you to operate a sole proprietorship under a name other than your own legal name. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the California Secretary of State’s website to check on name availability. 

In California, 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

You might also consider checking your name with the trademark office and the U.S. patent office.

2. File a trade name 

Filing a doing-business-as (DBA) name or what is also called a fictitious name or trade name can’t be done on the state level in California. The state has no registry of DBA names. Those wanting to start a sole proprietorship with a trade name must file it on the local level with a city or county where the business is located.

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 California 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. 

California doesn’t require a general business license for those who operate a sole proprietorship but local cities and counties may depend on their laws. 

The state does require a professional or occupational license for those in 200 different jobs including barbers, teachers, security guards, contractors, nurses, and attorneys. 

The state has a complete list of those who are required to have professional or occupational licenses.

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. (It’s also called a federal employer identification number). 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 file taxes 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 a freelancer 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.

Best LLC services

ZenBusiness
  • Start for $0 plus state fees
  • Fast & simple services
  • 100% accuracy guarantee
Visit ZenBusiness
northwest logoNorthwest Registered Agent
  • Same day filing service
  • Affordable pricing
  • Strict ethical code
Visit Northwest
Incfile.com
  • Your first year is free
  • Wide range of services
  • Technical support
Visit Incfile

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 debts that the business owes are also considered 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 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 own personal assets are on the line for lawsuits and other costs. 

How are sole proprietors taxed in California?

Income taxes 

With this type 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 California 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 for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Sole proprietors in California don’t have any additional taxes to pay because you are paying as an individual taxpayer. Your tax is based on your total income, including your proprietorship business. However, California has the highest marginal income tax in the nation.

The California income tax rate goes from 1% to 12.3%. California also sets fees it adds to incomes starting at incomes of $9,326 in addition to the percentages. Those making $9,326 will actually pay $93.25 plus 2% of their income in taxes. 

The highest bracket of those making $625,370 will pay $60,789.92 plus 12.3% of their income in taxes.

Other taxes 

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. 

The California sales tax is 7.25% and business owners, even sole proprietorships, are expected to collect it and send it to the state. Those hiring employees are expected to make certain payroll deductions for the state including unemployment insurance, employment training tax, state disability tax, and personal income tax.

Employers must pay half of those taxes and withhold the other half from paychecks.

Sole proprietors are also expected to pay any property taxes associated with a building owned or operated by the business.

FAQs

No, there isn’t any special licensing involved for those who want to start a sole prop in California. It remains an easy way to strike out on your own with few obstacles.

No, sole proprietorships are not a legal entity so registration isn’t necessary for taxes or permitting. However, you need to check with the local municipality where you’re located to find out if you need a business permit.

Regardless of how you do business in California, you will need a unique trade name just as any other business. 

You will still need to file a personal tax return for both the federal government and the state but you won’t report any income from the business since there isn’t any.

Lost money from your sole prop is reported on your income tax return and you will get credited for that.

Most advise to pay taxes quarterly on any sole prop business to avoid a large tax bill in April. That is especially true for those working and living in California. 

Taxes are paid to the California Franchise Tax Board as well as the IRS by filling out the proper IRS forms. Due dates are April 15, June 15, September 15 and January 15. 

You can hire W-2 employees and you can hire people working as independent contractors.You will need an EIN to hire W-2 employees and independent contractors will need to fill out an W-9 form.

You can make any amount you want since you keep all the profits. However, financial advisors say that those who make more than $80,000 a year should start a single-member LLC instead for tax and legal purposes.

You will need to check with the state to see if you need a professional license. The Professional Licensure Guide is a place to start.

While a separate bank account isn’t required if you are doing business in your own name, it is advised in order to control spending for the business versus personal bills. You will need one if you have a DBA name.

Yes, you may handle paying yourself any way you like with a sole prop but it must be informally. You can’t pay yourself wages where you receive a W-2. However, you must report all the profit your business earns on your tax returns whether you receive it or leave it in the business bank account.

Sole proprietorship owners might find additional information on the Office of Business and Economic Development website, along with the Employment Development Department. 

The post How to Start a Sole Proprietorship in California first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Alabama https://www.chamberofcommerce.org/sole-proprietorship/alabama Sat, 04 Jun 2022 02:07:02 +0000 https://www.chamberofcommerce.org/?p=23559 Those seeking to turn a hobby into a business or who want to do some side work in Alabama should consider starting a sole proprietorship business. Alabama is full of opportunities for those seeking to supplement their income or launch a startup.  That decision could be affected by the rules and regulations of the state. […]

The post How to Start a Sole Proprietorship in Alabama first appeared on Chamber of Commerce.

]]>

Those seeking to turn a hobby into a business or who want to do some side work in Alabama should consider starting a sole proprietorship business. Alabama is full of opportunities for those seeking to supplement their income or launch a startup. 

That decision could be affected by the rules and regulations of the state. Before you head to the heart of Dixie, it’s best to understand all the requirements that sole proprietors face in the state of Alabama. 

What is a sole proprietorship?

A sole proprietorship is a form of business. It’s considered an unincorporated business since it doesn’t need to be registered with the state, which has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a 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 owner, the owner is personally responsible for all of 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 Alabama

1. Choose your business name

Alabama 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 Alabama Department of State’s website to see if the name you chose is taken or if something similar exists. 

In Alabama, a business name must not: 

  • Match any company doing business in the state
  • Be misleading
  • Use any certain government agency terms or abbreviations like FBI or EPA

2. File a trade name 

First, you need to make sure your trade name is unique and original. You can do that by going to the state legal entity records website and list some words you want to use in the search engine to see what comes up. 

Once you pick a name, you need to start using it even before you register it. Alabama law requires at least three acceptable business items with the name on them in order for you to claim it and for you to be protected by your doing-business-as (DBA) name.

Acceptable items are business cards, flyers, decals, labels, and brochures. You must also pick the classification of your business according to the state schedule.

You can then file for it with the State of Alabama either online or by mail. Trade names are considered trademarks. The total cost of filing a trade name is $31.20 online and $30 if applying by mail. Renewals are $10 yearly.

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 Alabama 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. 

Sole proprietors in Alabama aren’t required to have a general business license from the state. However, they are required to have a privilege license issued by the probate judge in the county where the business is located. The license is good from Oct. 1 through Sept. 30 and must be renewed by Sept. 30 yearly. The fee is subject to local ordinances.

Local municipalities may have other types of fees, depending on your business. They could include contractor fees, zoning fees, and fees for home businesses. Depending on your occupation, you could also face professional licensing requirements. These can be required for people like hair stylists, dentists, nail technicians, and others.

You should check with the local city or county clerk to find out all the licensing and permitting requirements for your business.

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 file taxes and are not required to have an EIN. However, some banks will require new business owners to have an EIN and a business plan to open a business bank account or apply for a business loan. 

Next steps

Once you have these pieces in place, you’re officially a small business owner.  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 a freelancer 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 that the business owes are also considered 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 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 own assets are on the line for lawsuits and other costs. 

How are sole proprietors taxed in Alabama?

Income taxes 

With this type 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 for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal income tax return, including income from business activity at the applicable rate for the year.  

Alabama doesn’t have a specific or unique tax rate for sole proprietorships. Those operating a sole proprietorship are expected to report their income on the federal and state income tax returns, both of which are due April 15. 

The State of Alabama will follow the federal government in allowing extensions. Those granted an extension by the federal government will be given one by the state. 

Alabama tax rates fall into three categories, 2%, 4%, and 5%. The state Constitution stipulates it can never exceed 5 percent. The rate individuals pay depends on two things and they are your adjusted gross income and which filing status you choose.

Other taxes

As a self-employed individual, there are additional tax payments the sole proprietorship is obligated to pay. Based on the business’ income, the sole proprietor must pay Social Security and Medicare taxes. If your own 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. 

Alabama, like every state, has an array of taxes that could apply to a sole proprietorship, depending on the business. The general consumer’s use and a general rental tax are 4% each, but the rental tax on linens and garments is only 2%. The sales tax for vending is 4%. 

Alabama’s median real property tax rate is 3.33 per every $1,000, making it one of the lowest of all 50 states. It has long been low with a .50 percent rate in 2019. Property taxes are due between Oct. 1 and Dec. 31. They are late after Dec. 31.

FAQs

Those in a sole proprietorship don’t pay themselves a salary. Any profit after paying business expenses is your pay. Alabamans can’t deduct their pay on tax forms as a business expense either.

You report them on your individual tax return. The federal and state tax returns should have a listing of all losses or profits. The business isn’t taxed separately as the Internal Revenue Service (IRS) calls it a pass-through tax. 

No, those who are self-employed are a sole proprietor even if they don’t register for a trade name or set up a formal business. Their name is their business name. 

Both have advantages. A sole proprietorship is easy to start and doesn’t require a lot of annual reporting. An LLC has an advantage in that you don’t assume any liability as you do in a sole proprietorship, so it protects your personal assets. 

Those who are sole proprietors can get tax refunds if they have paid more taxes than their tax liability. 

An Alabama sole proprietor doesn’t need to submit any 1099 forms unless they hire subcontractors or contractors. They don’t have any employees but can hire contracted workers.

You can deduct the entire cost of a vehicle if you only use it for business. Otherwise, you can deduct the mileage and a portion of other things for business use.

You can choose how you pay taxes but most advise to pay quarterly. Otherwise, you will pay for the full year when you file your individual taxes.

The post How to Start a Sole Proprietorship in Alabama first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Alaska https://www.chamberofcommerce.org/sole-proprietorship/alaska Sat, 04 Jun 2022 02:07:02 +0000 https://www.chamberofcommerce.org/?p=23573 Thinking about starting a business in Alaska? The last frontier might be known for its snow and moose, but it has business opportunities too. However, the state does have some rules about launching a sole proprietorship in the state.   To help you navigate the new world of business, we’ve created a handy guide to help […]

The post How to Start a Sole Proprietorship in Alaska first appeared on Chamber of Commerce.

]]>

Thinking about starting a business in Alaska? The last frontier might be known for its snow and moose, but it has business opportunities too. However, the state does have some rules about launching a sole proprietorship in the state.  

To help you navigate the new world of business, we’ve created a handy guide to help you start your own sole prop.

What is a sole proprietorship?

A sole proprietorship is an unincorporated business structure with one owner. For tax and legal purposes, the business entity and the owner are considered the same entity. (It is not a legal entity). 

This is the simplest version of a 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 all of 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 Alaska

1. Choose your business name

Alaska 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 Alaska Department of Commerce to see if the name you chose is taken or if something similar exists. 

In Alaska, 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

Alaska is unique in that it issues business licenses for all businesses and gives owners the ability to register any name, even if there’s already a business in the state with the same name.  Anyone who wants a business license is entitled to one under state law. 

In Alaska, you register your trade name with the Department of Commerce. You do so by registering a new business license application by filing the form online or through the mail. Every business in Alaska is required to have a business license, even if you are operating as a sole proprietorship. 

All fees for new business licenses and business license renewals are currently waived.

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 Alaska 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. 

A number of occupations in Alaska require professional licensing and you will need that if you plan to start a sole prop in certain industries. Some occupations requiring professional licensing include behavioral analysts, collection agencies, guardians and conservators, midwives, and massage therapists. 

Go to the Alaska’s Professional Licensing Division for a complete list of occupations, more information, and how to register for a professional license.

You may also be required to have a local business license or permit to do some things like construction, remodeling, or counseling. There could also be zoning regulations you need to be aware of, especially if you plan on operating a business out of your home.

Some cities and counties have regulations on customers coming to your home and where you can store equipment. Check with your local city and county offices to learn about their specific regulations.

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 file taxes 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 a freelancer 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 or independent contractor 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.

Best LLC services

ZenBusiness
  • Start for $0 plus state fees
  • Fast & simple services
  • 100% accuracy guarantee
Visit ZenBusiness
northwest logoNorthwest Registered Agent
  • Same day filing service
  • Affordable pricing
  • Strict ethical code
Visit Northwest
Incfile.com
  • Your first year is free
  • Wide range of services
  • Technical support
Visit Incfile

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 own 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 owed 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 assets 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 own assets are on the line for lawsuits and other costs. 

How are sole proprietors taxed in Alaska?

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 personal income taxes. 

The owner makes tax payments on the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Alaska has a significant tax advantage for those with sole proprietorships. It has no state income tax. Alaska is only one in nine states that don’t have a state income tax return, which means you won’t pay taxes on the money you earn from your sole prop – at least not to the state. Federal taxes must still be paid.

Other taxes 

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. 

Another advantage of starting a sole prop in Alaska is that the state has no sales tax. However, local municipalities can charge up to 7.5% in a local option sales tax. 

You will need to pay property taxes on buildings the business owns and there could be some additional property tax if you build a separate building on your property. However, Alaska offers a lot of property tax discounts, including those for senior citizens, veterans, and disabled persons.

FAQs

Business licenses are issued by the state through the Corporations, Business & Professional Licensing office (CBPL) of the Alaska Department of Commerce, Community, and Economic Development (DCCED).

It can take several weeks to get a business license approved in Alaska.

It costs $50 to get a business license in Alaska and that includes sole proprietors as well as other types of businesses. The fee isn’t reduced for part of the year. It is $50 regardless of when you apply. 

A business license in Alaska is good for two years.

It depends on the business and whether you require products from the continental U.S. While there are nearly no taxes in Alaska, getting goods transported there for sale is expensive. 

Certified copies can be requested by submitting a Corporations SEction a Copy Request Form (08-562) along with the $5 per copy fee. It takes between 10 to 15 days to process the request after the office receives it.

It depends on what type of business you have but trademarking your brand will protect you for 10 years and prevent others from using it during that time.

General liability insurance isn’t a requirement of the state but it could be required by cities and counties as part of doing business. Some industry professional groups may require it also.

Yes, you can hire others to work for you. However, you will need a federal EIN if you plan on issuing them W-2 forms. 

No, Alaska doesn’t require sellers or resale permits because it doesn’t collect sales tax. However, local cities and counties may require sellers and reseller permits as well as vendor permits.

The state sees any company or individual that has sales, payroll, real or personal property within the state as someone who is doing business.

The post How to Start a Sole Proprietorship in Alaska first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Arizona https://www.chamberofcommerce.org/sole-proprietorship/arizona Sat, 04 Jun 2022 02:07:02 +0000 https://www.chamberofcommerce.org/?p=23602 Going west has a lot to offer many starting a sole proprietorship business. Arizona is one western state that has both desert beauty and a thriving economy. It’s not hard to start a business as a sole proprietorship there either as you don’t have to file any state documents to do it.  However, there are […]

The post How to Start a Sole Proprietorship in Arizona first appeared on Chamber of Commerce.

]]>

Going west has a lot to offer many starting a sole proprietorship business. Arizona is one western state that has both desert beauty and a thriving economy. It’s not hard to start a business as a sole proprietorship there either as you don’t have to file any state documents to do it. 

However, there are other documents you must file to do business in the land of the Wild West so we’ve put together a guide on setting up a sole proprietorship in Arizona.

What is a sole proprietorship?

A sole proprietorship is an unincorporated business structure with a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a 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 owner, the owner is personally responsible for all 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 small business owners who want 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 Arizona

1. Choose your business name

Arizona law allows you to operate the 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 Arizona Secretary of State’s website to see if the name you chose is taken or if something similar exists. 

In Arizona, 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

You are not legally required to file a trade name or mark in Arizona as a sole proprietor but it is an accepted business practice to file one with the Secretary of State’s Office. It creates a separate legal entity. Once you have found the name you want, you must send an application with a check or money order to:

Secretary of State
Business Services – Trade Names and Marks
1700 W. Washington, 7th Floor
Phoenix, AZ 85007

Once registered the trade name or mark becomes searchable through the Registered Name Information Search tool. The cost is $10 for standard DBA filing and $25 for expedite service. It typically takes up to three weeks to get a name registered.

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 Arizona 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. 

Arizona doesn’t require any state licenses or permits, other than the TPT license, to run a business. However, cities and counties do have their own laws about permitting. You will need to check where you will be basing your business to know if a permit or license is required. 

Some professions require special permitting and licensing. Food service requires food service certifications. Hairstylists and contractors often are required to have a state professional license. You will need to check to see if your industry requires special certifications to work in Arizona.

There are city zoning rules for home-based businesses too. Some Arizona cities allow one employee outside the home to come work for you but the City of Phoenix doesn’t allow anyone living outside the home to work for a home-based business. 

Other cities, like Mesa and Tucson, forbid anyone from selling goods at their home. Additional zoning rules apply to other home-based businesses like child care centers, salons, and mechanic shops.

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 file taxes 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 entity 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 doing business as a freelancer can technically be considered a sole proprietor of their own 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 a freelancer 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 another form of business, 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 that the business owes 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 Arizona?

Income tax payments 

With this type 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) reports for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal income tax return, including income from business activity at the applicable rate for the year.  

Arizona has different types of licensing and taxes that business owners must pay, which includes sole proprietorships. Businesses must pay for a transaction privilege tax (TPT) license yearly to continue to do business. 

This is collected through the Arizona Department of Revenue and renewals must be paid electronically no later than Jan. 1 by anyone doing more than $500 in business a year. The TPT license is good for one year from Jan. 1 through Dec. 31.

The state has penalties for those not filing, including paying 50% of the city renewal fee. 

Operating without a TPT license is a class 3 misdemeanor.

Arizona’s income tax rates are some of the lowest in the nation. They are separated into four brackets of 2.59%, 3.34%, 4.17%, and 4.5%. The brackets a person falls into and what they pay depend on taxable income, their residency in the state, and their tax filing status.

Other taxes 

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. 

Arizona enforces the federal 15.3% self employment tax that is reportable. This tax may apply to sole proprietors, but generally applies to LLC members who take profits from the business in lieu of a salary. Business expenses can be deducted from income in determining how much tax you owe. 

You will need to pay state sales tax on anything you sell. Arizona doesn’t impose a sales tax on items deemed necessities, like food or medicine. 

FAQs

The House of Representatives has a bill that allows fewer restrictions from local authorities on home-based businesses but currently, it is up to each city and county to determine if a business can be run out of a home. It depends on the business, zoning, and how it would affect neighbors.

It is not legally required that you register a trade name but most advise it to establish a brand, do marketing and begin a path toward a small business. 

The Secretary of State website lists all the various fees and taxes that may apply to your industry and your sole proprietor business.

Arizona recognizes that a business started by a husband and wife is one entity and is a sole proprietorship.

You will need an EIN in Arizona if you plan to hire employees.

The cost of a business license depends on the city or country where the business is based. 

Arizona has always been considered a good state for starting a business. It has low taxes and lots of opportunities.

The post How to Start a Sole Proprietorship in Arizona first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Arkansas https://www.chamberofcommerce.org/sole-proprietorship/arkansas Sat, 04 Jun 2022 02:07:02 +0000 https://www.chamberofcommerce.org/?p=23625 Arkansas has mountains, small and large cities, and plenty of opportunities to start a sole proprietorship business.  Before you decide to start a sole prop in Arkansas, you need to know all the facts about state laws and rules. Arkansas has its own rules and regulations regarding sole proprietorships. You will also need to know […]

The post How to Start a Sole Proprietorship in Arkansas first appeared on Chamber of Commerce.

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Arkansas has mountains, small and large cities, and plenty of opportunities to start a sole proprietorship business. 

Before you decide to start a sole prop in Arkansas, you need to know all the facts about state laws and rules. Arkansas has its own rules and regulations regarding sole proprietorships. You will also need to know its tax rates and other information.

We’ve prepared a guide to help you start your sole prop in Arkansas with all the data, facts and advice you need to get going and make your sole prop successful.

What is a sole proprietorship?

A sole proprietorship is a business structure in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a 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 owner, the owner is personally responsible for all debts and litigation that the business is named in. 

Who is a sole proprietorship best for?

By definition, a sole proprietorship is an unincorporated 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 Arkansas

1. Choose your business name

Arkansas 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 Arkansas Secretary of State to see if the name you chose is taken or if something similar exists. 

In Arkansas, 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

You will need to go to the Arkansas Secretary of State Business page to file your trade name. There is a link to file a fictitious name online. You can also file it by mail by mailing the form to the Secretary of State Business Commercial Services Division, Suite 250, Victory Building, 1401 West Capitol Ave., Suite 250,  Little Rock, AR 72201. The filing fee varies from $15 to $25 depending on the business. It can be cheaper to file electronically than by mail.

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 Arkansas 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. 

Some occupations must have professional licensing to do business in Arkansas. They can include professions like nail technicians, counselors, massage therapists, and construction trades. Arkansas is stricter on professional license requirements than many other states in requiring almost two years of experience, as well as passing a final exam. Fees to get a professional license can be around $200 in Arkansas.

Sole props will also need a business license from their local city or county to operate. Fees vary from municipality to municipality. You may also need a zoning clearance or variance if you choose to operate out of your home or within a building zoned for another purpose. A local city official can guide you on those requirements.

There could be other certificates you will need as a sole prop, depending on your industry. Some food operators would need a certificate from the Department of Health or USDA. Farmers could need some special permitting from either the federal or state government. You could also need some health certifications or food service certifications if you are operating in a health field or food service business, even as a sole prop.

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 file taxes 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 own business is ready to operate! With a solid business plan, you can begin doing business, generate marketing materials, land your first clients, and plan for growth.

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 a freelancer 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. An independent contractor 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 form of business. An LLC, or limited liability company, must file articles of organization and register with their state. This also protects small business owners (or owners, as an LLC can have multiple) from personal liability, and the business is treated as a separate legal entity 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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  • Start for $0 plus state fees
  • Fast & simple services
  • 100% accuracy guarantee
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northwest logoNorthwest Registered Agent
  • Same day filing service
  • Affordable pricing
  • Strict ethical code
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Incfile.com
  • Your first year is free
  • Wide range of services
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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 personal income 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 prop?

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 Arkansas?

Income taxes

With this type of business entity, 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) reports for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Arkansas has a bracketed system of income taxes. Those earning less than $5,000 pay nothing and those in the highest income bracket pay 6.6%. That bracket starts at $79,301. Those making more than that pay an additional percentage of between 2% and 5.9% based on the amount of money you earn above $79,301.

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. 

Arkansas has a 6.5% sales tax rate. Anyone selling goods and services must collect a sales tax for the state. Local municipalities may also have additional taxes. You may also need to pay property tax if you own a building for your business or have a building on your residential property. 

FAQs

You can start a sole prop business in Arkansas without filing any legal papers with the state. However, you will still need a local business license and other required certifications.

No, income from a sole proprietorship in Arkansas is earned by the business owner. The business owner pays taxes of his income to the state. 

Those wishing to dissolve their sole proprietorship must submit a completed dissolution form by mail or in person to the Arkansas Secretary of State, Business and Commercial Services. The state doesn’t allow you to submit articles of dissolution electronically.

A sales tax permit costs $50 in Arkansas. There could be other business registration feeds that apply to some businesses.

Yes, all items sold in Arkansas are subject to the 6.5% sales tax rate. 

Yes, you can work your sole proprietorship business out of your home in Arkansas. However, there may be some restrictions depending on the business, customers coming to your home, vehicles, and other typical concerns.

Those sole props who wish to sell online need to meet the same requirements as all other businesses. They need a business license from the local municipality and to register for sales tax registration. 

Any vendor who sells services or property that’s subject to Arkansas sales tax must register for a permit under the Gross Receipts Tax Law.

You can register online by going to the state website and filling out the form. The form can be done electronically.

It depends on the city or county where your business is located but a business license can cost between $50 and $1,000. Some of the cost calculation depends on the type of business you have and your inventory.

The post How to Start a Sole Proprietorship in Arkansas first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Connecticut https://www.chamberofcommerce.org/sole-proprietorship/connecticut Sat, 04 Jun 2022 02:07:01 +0000 https://www.chamberofcommerce.org/?p=23648 During the process of starting a business, many people identify sole proprietorships as the structure they think will work best for them. These businesses are simple and inexpensive to create, making them the most popular structure not just in Connecticut, but all of the United States.  However, a sole proprietorship must still follow certain rules […]

The post How to Start a Sole Proprietorship in Connecticut first appeared on Chamber of Commerce.

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During the process of starting a business, many people identify sole proprietorships as the structure they think will work best for them. These businesses are simple and inexpensive to create, making them the most popular structure not just in Connecticut, but all of the United States. 

However, a sole proprietorship must still follow certain rules and regulations like all businesses and have some unique challenges of their own. Before deciding if this structure is right for you, it is important to understand all aspects of a sole proprietorship. 

What is a sole proprietorship?

A sole proprietorship is an unincorporated business entity that has a single owner. This is the simplest possible structure to set up as a small business owner. While there can only be one owner, a sole proprietorship can have employees and obtain an Employer Identification Number (EIN). 

As a sole proprietor, your business profits are taxed on your personal income tax return. Your tax payments are paid personally. This makes the process simple, but can also expose you to personal liability in some cases. 

Who is a sole proprietorship best for?

A sole proprietorship makes sense if you:

  • Plan to start a business where only you are in charge and intend for that to be the case going forward
  • Want to call your business something other than your legal name
  • Plan to hire employees
  • Want to set up a business quickly

How to set up a sole proprietorship in Connecticut 

1. Choose your business name

Connecticut law allows you to operate a sole proprietorship under a name other than your own name, also known as an assumed name or trade name. 

In Connecticut, a startup 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
  • Use a business entity suffix, like LLC, where it is not accurate 

2. File a trade name or fictitious name

When your business is operating under a name other than the one on your tax returns, you will need to file for a trade name certificate. This is done through the town clerk in the town where you do business, rather than at the state level. You can reference the town clerks directory for Connecticut to find the relevant office or offices for your business. In each town, the filing fee for a trade name is $5.

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 Connecticut Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas. 

Not every business in Connecticut will require a license as there is no general requirement throughout the state for sole proprietorships. However, most businesses will need a license to collect and remit sales tax, and others may have industry-specific licensing requirements. 

In Connecticut, a sales tax permit is required for any business with a physical presence in the state that sells, rents, or leases goods or provides a taxable service. These permits can be obtained through the Connecticut Taxpayer Services Center or by mailing in these forms. There is a $100 fee associated with this, and it can take up to 15 business days to receive the formal license. In the meantime, a temporary one is provided so that sales can begin immediately. Sales tax permits must be renewed every 2 years.

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 file taxes 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, you officially have your own business! 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?

A Connecticut  LLC is a limited liability company that can be formed by one or multiple people. The primary difference in an LLC is that it is a separate legal entity from the owner. In other words, your business and your personal assets are separate. With an LLC, taxes are filed separately and the business’ liability does not translate to the owner. 

Setting up a sole proprietorship is simpler than setting up an LLC because it does not have the same business tax implications.

If you’re freelancing, you might wonder if you need to set up a sole prop. If you plan to hire freelancers or other independent contractors, then yes. To hire others, you need a business structure like a sole proprietorship. 

If you don’t plan to hire anyone, you can continue to freelance and pay taxes on the income without setting up a sole prop. 

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  • Start for $0 plus state fees
  • Fast & simple services
  • 100% accuracy guarantee
Visit ZenBusiness
northwest logoNorthwest Registered Agent
  • Same day filing service
  • Affordable pricing
  • Strict ethical code
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Incfile.com
  • Your first year is free
  • Wide range of services
  • Technical support
Visit Incfile

What are the advantages of a sole proprietorship in Connecticut?

Simple way to start a business

Connecticut Sole proprietorships are incredibly easy to set up and do not require any filing process or fees at the outset. In fact, if you have done any freelance work or made money through a side hustle, you are technically operating a sole proprietorship. The simple and inexpensive start means you can quickly legitimize any business you are doing by opening a bank account and distributing formal marketing materials. 

Your business remains yours

As the owner of a sole proprietorship, you have complete control of your business. Decisions will not need to take into account legal partners, shareholders, or partners, giving you the freedom to change your course or adjust as you learn about your business. 

Easy transition to a corporation

Starting a business as a sole proprietor does not mean you will have to operate that way through the life of your business. At any time, you can convert a business to an LLC, corporation, or general partnership with the right paperwork and process. This allows you to feel out your business and settle on a model before you move to a corporate structure. 

What are the cons of setting up a sole proprietorship? 

No personal asset protection

In the sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. The business’s debts become your financial obligation. Your personal assets and property can be used to meet that obligation.

Less access to funding

A sole proprietorship may not be given the same access to business loans and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for this form of business. You may also experience problems raising capital in the beginning since a sole proprietorship doesn’t carry the same credibility as an LLC or corporation. 

Harder to sell your business

If your business grows to a place where you are profitable and have others interested in taking ownership, being structured as a sole proprietorship can present challenges. You would be subject to capital gains tax as part of the transaction, and any buyer would also be assuming liability for business debts. 

How are sole proprietors taxed in Connecticut?

Income taxes 

With this type 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 for the purpose of income taxes. 

Connecticut has a progressive tax rate, with seven income brackets ranging from 3% to 6.99%. Based on the amount of income an individual or couple brings in through their sole proprietorships, the relevant rate will be applied to these earnings. 

Other taxes

As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor 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. 

Connecticut also has one of the highest property tax rates in the country, with an average effective property tax rate of 2.14%. Only two states are higher. 

If a sole proprietorship has any employees, the owner is responsible for filing the proper withholdings through the state and taxing the employee to remit to the state. 

FAQs

Almost any business with a physical presence in Connecticut must obtain a sales tax permit. This includes out-of-state online businesses who sell over $250,000 or 200 transactions to Connecticut residents and have regular systematic solicitation of sales in Connecticut. In the state, most goods are subject to a sales tax, while most services are not.

In order to operate under a name other than your own legal name, a trade name must be filed with the town clerk where you do business. The fee to do this is $5. However, if you have multiple locations or are working in multiple towns, you will need to file with each clerk, meaning you may pay this $5 fee multiple times.

An employee identification number, or EIN, is used by the IRS for tax purposes. Sole proprietorships file their taxes on their personal income taxes and thus do not require a business tax ID number. However, if a sole proprietorship has one or more employees, an EIN will be necessary in order to file federal taxes related to their employment.

Connecticut issues tax IDs separate from the EIN issued by the IRS. These IDs are used for businesses to file their taxes. Sole proprietorships are not required to obtain a tax ID in Connecticut as they claim business income and expenses on their personal returns. However, if the sole proprietorship has employees, they will need a tax ID in order to properly withhold and file employment taxes.

While Connecticut has a general business license requirement, it does not apply to sole proprietorships. However, sole proprietorships will still need to obtain a sales tax permit as well as any professional licensure and industry licensure required. They may also need to obtain a business license in the town or municipality where they conduct business. 

Sole proprietorships are able to have employees. They must pay all applicable taxes and properly withhold and remit taxes on behalf of the employee to both the state of Connecticut as well as the federal government through the IRS. Having employees may also mean the business needs to obtain additional insurance. 

The fee to file for a sales tax permit in Connecticut is $100 and the license must be renewed every 2 years. However, a business must obtain this permit individually for every site or location it has in the state, so the cost may be more if your business has multiple locations.

The post How to Start a Sole Proprietorship in Connecticut first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Delaware https://www.chamberofcommerce.org/sole-proprietorship/delaware Sat, 04 Jun 2022 02:07:00 +0000 https://www.chamberofcommerce.org/?p=23668 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 […]

The post How to Start a Sole Proprietorship in Delaware first appeared on Chamber of Commerce.

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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.

The post How to Start a Sole Proprietorship in Delaware first appeared on Chamber of Commerce.

]]> How to Start a Sole Proprietorship in Georgia https://www.chamberofcommerce.org/sole-proprietorship/georgia Sat, 04 Jun 2022 02:06:31 +0000 https://www.chamberofcommerce.org/?p=23688 Georgia has good weather, a good business economy, and lots of natural wonders. It’s a great place to live and start a business.  Before you decide to start a business, like a sole proprietorship, in Georgia, you need to be aware of all the laws, rules, and regulations the state has regarding this type of […]

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Georgia has good weather, a good business economy, and lots of natural wonders. It’s a great place to live and start a business. 

Before you decide to start a business, like a sole proprietorship, in Georgia, you need to be aware of all the laws, rules, and regulations the state has regarding this type of business. Every state has its own sole prop laws and Georgia is no exception. 

We’ve created a guide to help you in starting your sole proprietor business in Georgia with all the data along with guidelines and helpful links.

What is a sole proprietorship?

A sole proprietorship is a business structure in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same entity. This is the simplest version of a 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 owner, the owner is personally responsible for all debts and litigation that the business is named in. 

Who is a sole proprietorship best for?

By definition, a sole proprietorship is an unincorporated 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 Georgia

1. Choose your business name

Georgia 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 Georgia Secretary of State to see if the name you chose is taken or if something similar exists. 

In Georgia, 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

In Georgia, you need to search the local county records to see if you can use your trade name. All trade names, or doing-business-as names, are filed with local county clerks. 

Once you have the trade name you want, you need to write out the purpose and scope of the business, list all the owners with their names and addresses, and get the notarized signatures of all company owners. 

There are required forms and some of them, like a Trade Name Application, may include some of this information and require a notary. The forms are different in various Georgia counties. You will need to pick them up from the Clerk’s Office of the Superior Court in the county where you will be basing your business.

You also need to pay a filing fee when you submit your paperwork to the clerk. The amount differs in all counties.

Georgia law requires you to publish a notice of your intent to hold a trade name in the county’s official legal organ, a designated newspaper, at least once a week for two consecutive weeks. That also requires a payment to the newspaper, which can vary. Keep the Publisher’s Affidavit as proof to the county that you published the notice.

It can take several weeks to get a trade name approved but, once approved, it will never need to be renewed.

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 Georgia 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. 

Georgia doesn’t require a state business license for a sole prop but local cities and counties will likely require one for you to do business. Professional licenses may also be required for certain occupations like hairstylist, mechanic, nail technician, and other occupations. It’s illegal to operate without one. 

There could be a need for zoning or other permits if the sole prop is a business run out of the home, depending on what the business is. In Georgia, local governments have no problem with someone like an accountant having a home office but could require extra permitting and zoning for an auto shop or salon. 

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 file taxes 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 own business is ready to operate! With a solid business plan, you can begin doing business, generate marketing materials, land your first clients, and plan for growth.

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 a freelancer 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. An independent contractor 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 form of business. An LLC, or limited liability company, must file articles of organization and register with their state. This also protects small business owners (or owners, as an LLC can have multiple) from personal liability, and the business is treated as a separate legal entity 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.

Best LLC services

ZenBusiness
  • Start for $0 plus state fees
  • Fast & simple services
  • 100% accuracy guarantee
Visit ZenBusiness
northwest logoNorthwest Registered Agent
  • Same day filing service
  • Affordable pricing
  • Strict ethical code
Visit Northwest
Incfile.com
  • Your first year is free
  • Wide range of services
  • Technical support
Visit Incfile

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 personal income 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 Georgia?

Income taxes

With this type of business entity, 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 for the purpose of income taxes. 

The owner then pays income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.  

Georgia’s income tax rate is one of the lowest in the country. It is from 1% to 5.75% with the highest taxable bracket at $7,000 for single filers and $10,000 for married taxpayers who file a joint return. 

Those filing taxes have two options of paying them in Georgia. You can pay it all at once with your first installment or pay it quarterly. Quarterly payments are due on or before April 15, June 15, September 15, and January 15.

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. 

Georgia has a sales tax businesses must collect on goods and services. The sales tax rate is 4% but local cities and counties can implement a voter-approved special local option sales tax to pay for particular projects. That can increase the sales tax rate as high as 9%.

Local municipalities also collect property taxes and sole props that own buildings or have home-based businesses will pay property taxes as individuals since the business doesn’t exist apart from the business owner. Property in Georgia is taxed at 40% of its fair market value, which is the assessed value. There are exemptions such as homestead or senior citizen exemptions.

FAQs

The fees vary from county to county but the average fee to set up a sole prop in Georgia is $160.

Georgia doesn’t require sole props to register their business name with the state. However, you do need to file your trade name with the clerk of court in your county. 

Sole proprietorships are the most common form of business in Georgia. 

The Georgia Department of Revenue requires you to register your business for taxation in Georgia. You can do that by establishing a Georgia Tax Center account.

Yes, sole props can apply for a business bank account with their DBA name, assuming they have their trade name approved.

Those who operate as a sole prop can write off vehicle expenses like gasoline, insurance, tires, batteries, maintenance and repair work.

Yes, you need a business license under your DBA name. It’s an important element of establishing your reputation as a legal business. 

You can register for a sales tax permit online with the State of Georgia by applying through the Georgia Tax Center website.

The post How to Start a Sole Proprietorship in Georgia first appeared on Chamber of Commerce.

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