How to Start a Sole Proprietorship in Alaska
Ready to start a business on the Last Frontier? One of the easiest types of businesses to start in Alaska is a sole proprietorship. They’re easy to set up and don’t require any official paperwork. To learn more, check out our guide on setting up a sole proprietorship in the state of Alaska.
What is a sole proprietorship?
A sole proprietorship is an individual entrepreneur who sells goods or services.
There’s no legal distinction between the business owner and the company, so there’s no state-required paperwork to file or any kind of registration process to follow.
Due to their ease of setup, sole proprietorships are a popular type of business for those who are dabbling with a business idea or those who want to explore a business idea in conjunction with a full-time job.
Examples of sole proprietors
A virtual assistant with a profile on Upwork, an artist selling their work at a local market, or an entrepreneur selling goods on Amazon or eBay.
What qualifies your business as a sole proprietorship?
You become a sole proprietor when you make your first sale.
Since there’s no official business registered with the state, any debts or liabilities that you encounter with the business are your own.
Unlike other business types, like an LLC or corporation, a sole proprietorship does not offer any liability protection, which means your personal assets are not protected and can be used to bail out your own business.
Sole proprietorship vs. LLC
A sole proprietorship is a business entity that’s started with your first sale. There’s no state registration or annual reports to file, but it does not offer its owner any liability protection.
A limited liability company, or LLC, can be run by multiple owners, provides liability protection, and is registered with the state. Annual reports are usually required too.
Who is it best for?
A sole proprietorship is usually best for budding entrepreneurs or someone who’s interested in starting a business as a side hustle. Maybe you want to try selling things through Etsy or Amazon or want to see if you can pick up some extra cash as a freelance writer, designer, or marketer. You can set up your store or connect with clients without going through a lot of steps to establish a business.
Sole proprietors are owned by one person, but the owner can hire employees. If your online store starts to grow, for example, and you need help fulfilling orders, you can hire an assistant.
If your business grows, you can consider changing from a sole proprietorship to an LLC or another business type that provides liability protection.
How to set up a sole proprietorship in Alaska
To start a sole proprietorship in Alaska, there are a few considerations you should work through. For starters, do you want to name your business? You can create a business name if you’d like. You should also check on state and local business licenses too, to make sure you have what you need to operate legally.
Is there any formal paperwork filed to establish this type of business?
No. Sole proprietors don’t file any registration paperwork with the state or file any reports. Without any state-documented registration, you can prove that you own a business only by presenting your tax returns.
If you want to operate under a business name, as opposed to your legal name, you can file a DBA (doing business as) with the state. It’s not required, and even if you do so, your startup remains an unincorporated business. Filing a DBA simply gives you the legal right to promote your business by a new name.
Naming a sole proprietorship in Alaska
You don’t need to name your business. If you conduct business without an official name, your business name is automatically your own name. You and your business will file taxes using your social security number.
If, however, you’d like to call your business by something other than your name, you can do so. You’ll need to file a DBA, which stands for ‘doing business as.’ In Alaska, you can file the proper DBA forms with the Secretary of State. (It’s also referred to as a trade name).
Filing a DBA gives you the right to use your business name, but there’s no liability protection that comes with it.
Permits and licenses in Alaska
Sole proprietors don’t need to acquire a business license in Alaska, however, it’s always best to call your county or city clerk and ask about necessary business licenses. There are certain licenses needed for certain industries, like fishing, so it’s best to call local officials rather than assume you don’t need one.
Consider keeping finances separate
In the simplest of terms, a sole proprietorship exists when you start conducting business. Before you make your first sale, you might want to consider keeping your business assets separate from your personal assets. To do so, it’s best to set up a business checking account.
You’ll need to obtain an EIN, or employer identification number, from the IRS first. It should only take a few minutes to get this nine-digit number on the IRS website.
Once you have the number, you can use it to open a business bank account, either through a local branch or a digital bank.
Why should you keep personal and business funds separate? Small business owners need an accurate account of transactions for tax payments. Separate accounts make filing individual tax returns easier.
Sole proprietors are subject to taxes, just as any resident. You’ll pay the necessary taxes, both federal and state, on your income. Sole proprietors pay pass-through taxes, which simply means business profits are paid out on your personal income tax returns that are filed annually with the IRS and the state. Your personal taxes will include a Schedule C.
A sole proprietorship does not pay separate business taxes.
- Are easy to set up.
- Don’t require any registration paperwork.
- Give owners a chance to start a small business quickly.
- Can hire employees.
- Won’t complicate your tax returns.
- Give the owner complete control of the company.
- Don’t offer any kind of liability protection.
- Can only have a single owner.
- Often aren’t eligible for grants or certain types of funding.
Do sole proprietorships have to register in Alaska?
No. Sole proprietorships do not register their new business with the state. Any startup with one owner can be considered a sole proprietorship.
Do sole proprietorships need an EIN?
As the owner of a sole proprietorship, you don’t need to get an EIN unless you plan to hire employees or open a business bank account. Obtaining an EIN is quickly done on the IRS website, and gives you an instant nine-digit employer identification number for your business.
How do you prove you have a sole proprietorship?
Since there are no official business forms filed with the state, the proof of your business exists on your personal tax returns.
What’s the difference between sole proprietorship and freelancing?
A freelancer can’t hire employees and wouldn’t have an EIN or any business licenses. A sole proprietor can hire employees and obtains the necessary licenses to work in the city, county, or state.
Is liability protection offered to sole proprietorships?
No. Sole proprietorships do not have liability protection. LLCs and corporations have personal liability protection, which safeguards personal assets like a car, home, and bank account from most business-related debts or lawsuits.
Do you need a business plan to start a sole proprietorship?
A business plan isn’t required, but any business expert will tell you that a business plan is highly recommended. In this plan, you’ll explain the business activity, discuss revenue streams, explore your target market, and make a plan for future success.
Does a sole proprietor need an accountant?
No. A sole proprietor does not need an accountant, but for tax purposes, it can be helpful. While tax software exists that can help you do things like calculate your tax rate, an accountant can provide advice as your company grows.
How do you report business income on your taxes?
As a sole proprietor, you’ll file a Schedule C on your taxes, which will list your income and calculate the taxes you owe on it. You’ll pay both federal and state taxes, provided your state levies an income tax. You may also be subject to self-employment taxes too.
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