How to Start a Sole Proprietorship in Colorado
Looking to start your own business in colorful Colorado? You can start a sole proprietorship or a business with just one owner in a few easy steps. You’ll need to fill out a document or two, but it won’t take much time. Read on to discover what you need to do to start a sole proprietorship in Colorado.
What is a sole proprietorship?
A business with just one owner is known as a sole proprietorship. This business is usually indistinguishable from the owner, who will pay personal income tax over the business proceeds. Many sole proprietorships have the same name as the owner, but you can use a separate name if you like.
Examples of a sole proprietorship
- A freelance writer or editor working through a platform or their own website.
- A seamstress designing clothes for sale on Etsy.
- An individual selling eggs which were laid by their chickens at the farmers market.
- Any individual who owns an online store with products for sale on Amazon or Instagram.
What qualifies your business as a sole proprietorship?
Your business qualifies as a sole proprietorship as long as it has only one owner, and you are performing business activities.
Unlike other business types, like an LLC or S-corp, you don’t need to file any paperwork prior to becoming a sole proprietorship. Do note, however, that a sole proprietorship is indistinguishable from its owner, meaning any debts taken on by the business will become the responsibility of the sole proprietor.
Sole proprietorship vs LLC
A sole proprietorship is a business owned by one person who agrees to pay personal taxes on any business profits made. The business and the owner often have the same name and cannot be distinguished from one another.
An LLC is a limited liability company that separates a business from its owner. LLCs require paperwork to be filed before they can operate, but doing so protects the business owner from the debt and liabilities of the company.
Who is it best for?
While there are both pros and cons of a sole proprietorship, they are recommended for those who wish to start up a small business or side hustle that doesn’t require a lot of risk.
Sole proprietorships, while they are riskier, do allow a business owner to grow when needed without the complications of partnership paperwork or profit sharing. If you start a sole proprietorship and decide later that you need more legal protections, you can later convert your business to a single-member LLC, making a sole proprietorship perfect for those just starting their business dreams.
How to set up a sole proprietorship in Colorado
Ready to set up a sole proprietorship in Colorado? You’ll just need to take a few steps, which include choosing a name for your business and acquiring the required permits to operate your business.
Is there any formal paperwork filed to establish this type of business?
In Colorado, there are no forms you need to fill out to become a sole proprietor. In the eyes of the state, you become a sole proprietor the minute you charge someone for goods or services.
Naming your business
No matter what business structure you have chosen, you must have a name for your business. If you don’t want to choose one, your legal name will automatically be used.
Using your own name
Many sole proprietorships choose to operate under the legal name of the owner since they are indistinguishable under the law anyway. Plus, if you choose to use your own name as your business name, you don’t have to worry about the same renewal regulations as a trade name.
Setting up a DBA
C olorado sole proprietorships can select any name they wish, but for legal reasons, it is a good idea to pick a name that no one else in the state is using.
If you aren’t using your name for your sole proprietorship, you are allowed to choose another name. This name is often called a DBA or ‘doing business as’ name, but in Colorado, it is referred to as a trade name.
Once you choose a name for your new business, you’ll need to file it with the Colorado Secretary of State using a statement of trade name form. You can file this form on the Secretary of State’s website. Although the trade name option is listed under the LLC list, it is the same form whether you are opening an LLC or a sole proprietorship.
The fee to do so is low, but if you skip this step, you will find yourself with a hefty fine later, as it is required to register your trade name with the state if you are not using your own name.
Additionally, Colorado businesses are required to renew their trade name each year. The name will expire at the end of the calendar year, and you will need to pay a filing fee of a few dollars to keep the name in the coming year.
For tax purposes, you and the business are the same, even if your business has a trade name.
Depending on your business type, you will need to check if you need to obtain zoning or other permits for doing business in the state of Colorado. For example, a restaurant will require a food service permit, while a marijuana company will require a special cannabis permit. You can find all the permits required for various businesses on the Colorado Office of Economic Development website.
Consider getting an EIN
Although your business is a sole proprietorship, you may want to hire help at some point during your operation. If you plan to hire help, it’s advised to apply for an EIN or employer identification number.
This number is basically a tax ID used by the IRS when you and your employees file their taxes. If you choose not to request an EIN, you will need to provide your social security number or SSN instead. You will request an EIN from the IRS website.
Open a business bank account
Even though your business and yourself will share funds, it is a good idea to get a business bank account. This will allow you an account number to provide to vendors and customers which isn’t your personal bank account.
Paying taxes when you own a sole proprietorship is relatively easy. You will start by filing your personal tax return as you normally would with both the federal government and the state, but you will include one additional form known as a Schedule C.
The Schedule C form is a record of your business profits or losses that can be used by the IRS or internal revenue service to estimate the federal tax you owe for the goods and services you have sold. You will not be subject to business taxes and will instead pay self-employment taxes.
- Simple start-up process.
- Very little paperwork is required to open your business (no articles of organization or incorporation documents needed)
- Anyone can start a sole proprietorship.
- The taxes of your business are part of your personal taxes.
- You retain full control over your business.
- You can still hire employees.
- The owner of the business is liable for all debts of the company, even to the point where they may lose personal assets because the business and the person are the same legal entity.
- You cannot have a business partner.
- You may not be eligible for government grants.
- Personal liability is unlimited (no liability protection whatsoever).
- If you use a trade name, it must be renewed every year
- Less social protections than other business schemas.
Does a sole proprietor need to register in Colorado?
You don’t need to register your sole proprietorship in Colorado, simply start pursuing your business activities, and you are considered a sole proprietor under the law. If you want to use a trade name, however, this must be filed before you begin operating your business.
Does a sole proprietor need to create a separate name for his or her business?
In Colorado, you do not need a separate name for your business; you can simply do business under your name. If you want a different name for your business that is not your own, you will need to file for a trade name.
How much does it cost to get a business license in Colorado?
You do not need a business license to operate a sole proprietorship in Colorado; however, if you need to collect sales tax for physical goods, you will need a sales tax license, and it will cost anywhere from $15-30, depending on the city you live in. Those in Denver will pay more than other cities.
How much does a trade name cost in Colorado?
The cost for filing a trade name (the Colorado version of a DBA name) is usually around $20. Keep in mind you will need to renew this name each year, and the cost for renewal is around $3.
Do Colorado sole proprietorships collect sales tax?
Every Colorado business entity that retails goods must collect and report sales tax, including sole proprietorships. These taxes are collected by the Colorado Department of Revenue, and you may need to apply for a sales tax license to collect them, depending on your business.
What is a use tax in Colorado?
A use tax in Colorado is a tax on properties used by business owners which are tax-exempt. The rules vary by city, so check with your local government about use taxes in your area.
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