For many aspiring business owners, the process of registering and setting up your business can be overwhelming. A sole proprietorship is the most common form of business in Oregon because it offers a fast, inexpensive, and simple way to start a business without as much red tape.
While this structure has many benefits, there are also reasons that a sole proprietorship may not fit every business. Read on to learn the way Oregon treats these entities and determine if it is the right choice for you.
What is a sole proprietorship?
A sole proprietorship is a business entity that refers to an unincorporated business with 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 Oregon
1. Choose your business name
Oregon law allows you to operate a sole proprietorship under a name other than your own 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 Oregon Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Oregon, 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
- Include terms given to financial institutions like banks, trust companies, savings, or credit unions where they are not relevant
- Use special characters like an asterisk, brace, dollar sign, tilde, or equal sign
2. File a trade name or fictitious name
Once you have determined that your sole proprietorship will operate under an assumed name and determined what it will be, you will need to register it with the state. This can be done either online through the Secretary of State’s website or by completing the Assumed Business Name – New Registration Form and mailing it to the provided address. There is also a $50 fee associated with filing an assumed 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 Oregon Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
There is no standard state business license in Oregon. Because there is no statewide sales tax, there is also no Oregon seller’s permit that must be obtained. However, it is important to check the Oregon Business Xpress License Directory to see if your specific business may require any permits to operate in compliance with the law.
You should also explore local regulations like building permits and zoning clearances where appropriate. This can include needing to register your business, as the City of Portland requires. Because localities can impose sales tax, they may also require their own seller’s permits in order to collect and remit the tax within their jurisdiction.
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.
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?
An Oregon 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, 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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What are the advantages of a sole proprietorship in Oregon?
Simple way to start a business
Oregon 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 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 business debts.
How are sole proprietors taxed in Oregon?
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 owners make tax payments on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Oregon has one of the higher income tax rates in the country, with a progressive system that can assess up to 9.9% on an individual. However, a sole proprietorship is not subject to Oregon’s additional business income taxes, including minimum excise 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 average effective property tax rate in Oregon is 0.90%.
Oregon is unique in that it does not assess a sales tax at the state level, though counties and cities can choose to impose a local sales tax.
When you start a sole proprietorship in Oregon, it will use your legal name as the business name and there is no requirement to change this. However, you can choose to register an assumed name if you would like to operate under one. You can register for an assumed name through the state.
There is no standard license that is required statewide in Oregon for any business structure. Additionally, because the state does not impose a sales tax, there is also not a statewide seller’s permit that must be obtained. Only those in professions or industries with their own permit and license requirements will need to apply through the state.
The IRS issues EINs, or Employee Identification Numbers, at the federal level in order to trace business taxes. Because sole proprietorships file taxes as an individual, they may use a Social Security Number instead, unless they have employees. Oregon also issues a Business ID Number, or BIN, which is a state tax ID number. It is also only required for businesses with employees.
In Oregon, sole proprietorships are not required to have workers’ compensation insurance for their employees. However, they are still able to purchase this insurance and provide it even though it is not required. Because the owner of a sole prop is liable for any legal obligations of the business, it is recommended to have some form of insurance.
A sole proprietor and a business are considered a single entity in Oregon, the former can sign any and all contracts in their personal legal name. These contracts would be considered legally binding and allow the owner to absorb any liability that results from the contract. In the same vein, clients or customers could write a check to the business by using the owner’s name or transferring funds.
Before filing an assumed name, you must first use Oregon’s database to ensure no one else has chosen the same business name. Once your name is approved and registered, no one else will be able to use it as it will appear on the database for them. However, this will only apply within the state of Oregon as no national law exists without a formal trademark in place.
Oregon is one of few states that have no sales or use taxes imposed, which means the state does not issue seller’s permits as there is no tax to collect. Each city or county may impose a local sales tax which requires individual seller’s permits.