Maine can net you a sea of opportunities as a sole proprietor.
Maine, like so many states, has its own way of operating. That means it sets its own laws and regulations for sole props. It’s a good idea to know about them before plunging into a sole prop business in this seaside state.
We’ve created a guide to help you as you coast through setting up your sole prop. There’s some advice included too so you can start off successfully and not feel like you have to fish your way through state offices to get approvals.
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 Maine
1. Choose your business name
Maine 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 Maine Secretary of State website to see if the name you chose is taken or if something similar exists.
In Maine, 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
Maine doesn’t require those with a trade name, or doing-business-as name, to register with the state. However, you must register it with the local town clerk where your sole prop is based.
To do that, you must get the Assumed Business Name registration form from the clerk. You then fill it out, have it notarized, and submit it.
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 Maine 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.
Even though the state doesn’t require that you register your sole prop, there are many other forms and permits you may need to submit. You will need to register with Maine Revenue Services to collect sales tax and with the local clerk to get a business license.
You may need a professional license if you are in certain occupations like chiropractic, dental, nail technician, and construction. You may also need an occupancy permit if you have a commercial space, fire marshall approval, and health department approval.
Zoning could be an issue depending on your industry and location. Those who operate businesses out of their home could have issues if they have a number of customers visit them, build a separate building for their business, or have large equipment.
Homeowners Associations (HOAs) can also have rules about how you use your home and property so certain things, like installing a greenhouse, must be approved by the board.
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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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 Maine?
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.
Maine has a graduated income tax that starts at 5.8% and goes as high as 7.15%. This rate started in 2015 and will continue through 2022. The state divides filers into single, married filing jointly, and head of household.
The tax rate schedules go from zero to $100,000 and over. Those in the top brackets must pay the tax plus 7.15% of any money over $100,000.
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.
Sole prop owners will need to pay property taxes whether it’s for their own real property, the business property they own, or the property they are renting. Property taxes are usually included as a part of the monthly rent.
In Maine, the property tax rate is higher than the national average at 1.30%. The average property owner in Maine will pay $2,597 annually in property taxes.
Additionally, personal property is also taxed in Maine. The state defines personal property as assets that are located or owned in Maine and used for a business. That includes furniture, desks, office supplies, equipment, and inventory.
Maine also has a 5.5% sales tax rate that all those selling goods and services must collect and pay. It doesn’t have local sales taxes so that is the only sales rate you’ll collect.
FAQs
Starting a sole prop in Maine is easy but maintaining a successful one may be challenging. You will likely need business funding while maintaining your job to pay your bills. Starting a sole prop takes time and lots of support. That includes both professional and business support.
There are a number of businesses that could be successful in Maine but it’s best to tie a sole prop to service industries already there so you can have business-to-business revenue. In Maine, that would include fishing. It would also include the wood and paper products industry.
No, only those sole proprietors who operate under a name different from their legal name must file to use an assumed name in Maine.
Yes, the Maine Small Business Development Center (SBDC) has many resources that entrepreneurs find helpful. One of the most helpful items is a checklist for starting a new business.
Yes, you can start a home business in Maine. However, there are a host of rules for doing so. The Cooperative Extension put out a bulletin as a guide for starting a business in Maine detailing the advantages and disadvantages of all types of business entities.
Most sole props don’t have employees but those who do pay them as independent contractors. Independent contractors pay their own taxes, businesses don’t have to withhold it. That means you will issue them a 1099 form at the end of the year. Those who do decide to hire employees will need to get an Employee Identification Number (EIN) from the IRS before they hire anyone.
