New Mexico is populated with many small businesses. If you are good at something or have a passion that you want to make a profit out of, you can set up a sole proprietorship and own a business.
It doesn’t have to be a big business and you don’t have to quit your day job at first. Starting as a sole proprietorship will enable you to lay all the groundwork until you decide to expand to an LLC or corporation if everything works out.
Starting a sole prop is easy, and with a little guidance from the information in this article, you can set up a sole prop and start the business you’ve always dreamed of.
What is a sole proprietorship?
The simplest and most common business entity used to start a business in the United States is called a sole proprietorship. These businesses are formed when a single owner creates an unincorporated business and runs that business as an individual.
In a sole proprietorship, there is no legal entity created, so there’s no difference between the owner and the business. This means the owner is entitled to all profits raised through the business and files them as part of their personal income taxes. However, this also means that any debts and losses are attributed to the individual, as well as them being implicated in any lawsuits brought against the business.
Who is a sole proprietorship best for?
If you are planning to start a business along with a partner or multiple partners, a sole proprietorship is not an option. The structure will be a good fit only if you plan to operate your business entirely independently, or with employees who report to you as the owner.
Many people choose a sole proprietorship if they need to quickly start their business or want to avoid filing fees and paperwork. In fact, if you are running the business in your own name, there is no paperwork to fill out at all to register your business. This allows the business to get up and running quickly with no friction.
A sole proprietorship comes with personal liability and it may be more difficult to secure a line of credit or investments.
How to set up a sole proprietorship in New Mexico
1. Choose your business name
New Mexico 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 New Mexico Department of State’s website to see if the name you chose is taken or if something similar exists.
In New Mexico, 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
Other states require you to register for a trade name or Doing Business As (DBA) name. However, it is not required to obtain a DBA in New Mexico. Although not required, it is still ideal for sole proprietors to acquire a trade name as it will enable them to do business under a different name other than their legal name.
Doing business under a fictitious name gives your business an image or brand separate from yourself, which is ideal for building trust with potential clients. It not only makes your business look more legitimate, but it also allows you to open a business bank account under your DBA name and it allows you to segregate your personal and business finances.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your startup, you may need to obtain a variety of business licenses or permits. This is managed by the New Mexico 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.
Most licensing in New Mexico happens at the local level, and sole proprietorships do not need to register with the state. However, you still need to obtain the necessary licenses to legally operate your business.
Some of these licenses might include zoning and building permits, occupational licenses, and other special permits. For example, if you plan on selling liquor and tobacco, you will need a permit to sell them. If you are a barber, accountant, or hunting instructor, you will need the specific permits to sell your services.
If you need help determining which licenses and permits are applicable to your business, you can visit the New Mexico Regulation and Licensing Department, or click here to see a list of agencies that will fill you in on your requirements and the specific licenses you need to operate 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 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! 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?
An LLC, or limited liability company, is another common structure used for small businesses in the United States. While an LLC can have a single owner, it can also be owned by multiple people working together. The key differentiator for an LLC is that it offers protection of the owner’s personal assets. As a separate legal entity, an LLC is liable for debts and legal obligations, but the owner cannot be personally liable for these items. If the business fails, the owner could file for a business bankruptcy without owing business creditors their own money.
If you’re wondering about the difference between freelancing and setting up a sole prop, you’d set up a sole prop if you plan to hire other writers to work with you. A freelancer, or independent contractor, can’t hire people, but a sole prop can.
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What are the advantages of a sole proprietorship?
Simplified tax preparation
For the owner of a sole proprietorship, tax preparation is not much more complicated than it is for any other private citizen. In preparing personal taxes, the owner will include all profits and losses related to the business, which is calculated as a part of their income or expenses. This also means the tax rate stays at their individual rate as opposed to higher business and corporate tax rates.
Less paperwork and fees
To register most types of business, the state requires you to file your business name for inclusion in their directory and pay a fee. The sole proprietorship does not have to do this. There will be some paperwork and fees involved if you require licenses or permits, or you plan to operate under a fictitious name.
Sole ownership
The sole proprietor of a business is responsible for everything, both good and bad. While liability is placed on that owner, they also enjoy complete control of their business. Any business decisions will be solely their responsibility, without worrying about pleasing shareholders or disagreements with a partner.
What are the cons of a sole proprietorship?
No asset separation
In a sole proprietorship, there is no legal separation between the assets of an owner and the business. While this makes things like taxes simple, it also means there is no delineation between the liabilities of an owner and their business. This means that if the business is not successful, the business’s debts fall to the sole proprietor, and if they cannot pay, it is their personal assets that will be seized. In the case of a lawsuit where money is owed, the same is true.
Single point of failure
When only one person is responsible for an entire business, it means that they are the single point of failure. If a sole proprietor passes away, becomes incapacitated, or is incarcerated, the business is usually not able to survive. While a corporation can be taken over as a legally separate entity, a sole proprietorship must be run by the owner.
Less availability of funding
With this business structure, finding startup funds could be tough. Many banks and investors do not like to offer funds to sole proprietors, as they cannot gain shares of the company or be sure that business debts will be repaid. Many government grants and business loans also exclude sole proprietorship.
How are sole proprietors taxed in New Mexico?
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 small business owner then pays taxes on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
The nature of your business will determine the taxes that apply to you as a sole proprietor, and some of them include sales tax, use tax, and other taxes that come with the goods or services you sell. New Mexico has a comprehensive list of taxable income for sole proprietors. You can view them here at the New Mexico Tax and Revenue Department’s website.
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, tax payments are not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and business taxes that are applicable.
For instance, New Mexico has a cigarette tax, bingo tax, raffle tax, conservation tax, alternative fuel tax, 911 surcharge tax, and more. But not all of these taxes will apply to you, and as stated before, it will depend solely on the nature of your business.
For additional taxes that may apply to your sole proprietorship, you can check all the necessary forms and instructions at the Business Taxpayer’s page of the New Mexico Taxation and Revenue Department’s site.
FAQs
Sole proprietors do not need to file separate business taxes in New Mexico, because all business income is filed under the sole proprietor’s personal tax return. Since taxes are filed separately, you might assume you don’t need a separate business bank account.
However, a business bank account is still a good idea. You can open a business account under the name of your business once you filed for a trade name.
Because sole proprietors are personally liable for all obligations and debt of the businesses they own, you can still obtain liability insurance to protect your personal assets. It is ideal for any sole proprietor in New Mexico or any other state to get liability insurance for financial protection against unforeseen events that could affect the business.
Aside from the capital, you need to start and operate your business, including creating products and other operational costs, the estimated cost to register a sole prop in New Mexico is around $200 to $500. Factors that affect the price are the specific licenses you need to obtain to legally operate, such as occupational licenses, zoning permits, and other specific licenses.
It depends. Choosing the right business structure depends on the time you have to operate a business, your capital, and the nature of the business itself. A sole proprietorship has its fair share of advantages, such as ease of setting up and lower cost. However, some of the disadvantages related to personal liability and business finances, which are different for LLCs.
