How to Start a Sole Proprietorship in Connecticut
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Starting a new business can be an exciting venture, and if you’re considering establishing a sole proprietorship in Connecticut, you’re on the right path to becoming your own boss. In this guide, we will walk you through the essential steps and key considerations to successfully launch your sole proprietorship in the Constitution State.
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What is a sole proprietorship?
One of the defining features of a sole proprietorship is the ease with which it can be established. Unlike more complex business structures that require extensive formalities, a sole proprietorship can be created simply by engaging in business activity as an individual.
While there may be certain local licensing requirements or permits to obtain, generally, there is no need to file any formal paperwork or create separate legal entities. This simplicity and flexibility make it an attractive option for individuals looking to start a small-scale business.
Examples of a sole proprietorship
A sole proprietorship can be any person running a business. This is often a single person offering professional services, like a home-based accountant or a hairdresser who runs a small salon studio.
What qualifies your business as a sole proprietorship?
A business is automatically considered a sole proprietorship if an individual runs the business. If you are conducting any business activity under your name, including as a freelancer or independent contractor, you are operating a sole proprietorship.
Sole proprietorship vs LLC
A sole proprietorship is an unincorporated business that does not include any legal protections for the owner, who is responsible for all business debts and obligations.
An LLC is a formal business structure that provides limited liability protection, separating personal and business assets. An LLC includes more paperwork and formalities than a sole proprietorship in order to maintain these protections.
Who is it best for?
A sole proprietorship is often the best fit for individuals who prefer to operate a business independently and maintain complete control over decision-making. It suits entrepreneurs who value simplicity, flexibility, and minimal administrative burdens. Here are some examples of who a sole proprietorship may be well-suited for:
- Freelancers and independent contractors who want to formalize their business while maintaining full autonomy.
- Small businesses with a narrow focus or a home-based structure where business owners can remain hands-on.
- Providers of a professional service who want to run a business based on their own identity and services.
- Those who want to run a startup on their own, without the burden of partners or shareholders.
- Low-risk ventures where there is less potential for liability to come into play.
- An individual with limited capital or access to financing to start a business.
- Anyone who needs to quickly start their business without many business forms and other paperwork.
How to start a sole proprietorship in Connecticut
One of the primary reasons entrepreneurs may choose a sole proprietorship is the simplicity of the business structure. In fact, you do not have to take any steps to be considered a sole proprietorship in Connecticut – simply operating a business in your own name means you have already become one.
However, there are rules and regulations that apply to these businesses just like they would any other, and optional steps that may legitimize or elevate your business.
Is there any formal paperwork filed to establish this type of business?
No. A sole proprietorship in Connecticut does not file any paperwork with the state. While other business entities, like an LLC, file Articles of Organization with the Secretary of State, sole proprietors don’t file anything.
Naming your business
In any business, the name is an important piece of your marketing and identity. With a sole prop, there are two ways you can go about choosing a name.
Using your own name
By default, a sole proprietorship is run under the legal name of its owner because they are the same legal entity. This means that if your name is Bob Smith, your business is also known as Bob Smith for legal and tax purposes. There is no requirement that these are unique, so it is okay if another Bob Smith operates a business in Connecticut as a sole proprietor.
Setting up a DBA
While using your legal name may be sufficient in some cases, many small business owners want to use a more public-facing name for a business they plan to advertise. In Connecticut, this is allowed by completing the process for a trade name, also known as a doing business as or DBA.
To choose a trade name, you must ensure it meets all Connecticut naming requirements. This includes not matching the name of any other business in the state, as well as avoiding any misleading or inaccurate wording. Once you have chosen the name, the town clerk in the city where you do business will help you file a trade name certificate and collect the fee of $5. With this, you can begin operations under the fictitious name.
How to Check if a Business Name is Taken
State licenses
Connecticut does not have any general licensing requirement for businesses in the state, but if your business sells or rents goods or provides a taxable service, you will need a sales tax permit. This permit is available through the Connecticut Taxpayer Services Center and costs $100, and allows your business to collect and remit sales tax. Sales tax permits must be renewed every 2 years.
Certain industries may also require professional licensing, and your local government can set its own requirements. Be sure to check with local government offices on zoning, permitting, and licensing regulations that may impact your business.
Hiring employees
While a sole proprietorship has only one owner, they can have employees that work for the business. Before you hire an employee, there are some additional steps you need to make to facilitate tax payments and withholdings. To do this, your business will need its own tax ID – you can file for an Employment Identification Number through the IRS for free. This allows you to hire employees and properly pay them.
Connecticut taxes
The owner of a sole proprietorship includes all business profits and losses on their personal tax return through the Schedule C form. This is treated as income and deductions when calculating taxes owed. Additionally, a sole proprietor is considered self-employed and therefore pays self-employment taxes.
Pros
- Easy and inexpensive to start and operate
- Complete control and decision-making power for the owner
- Simplified tax reporting, since it is all done on the owner’s personal tax return
- Flexibility to use personal assets as business assets
- Little paperwork and administrative upkeep required
- Can easily dissolve or transfer the business if desired
- No required financial disclosure or other regulations
Cons
- Personal liability falls on the owner, who takes on unlimited liability for all business debts and obligations, including lawsuits.
- Difficulty raising capital and a reliance on the owner’s personal finances for funding.
- Trouble gaining investors and large-scale funding, and even getting a business bank account or other resources.
- Hard to sell or transfer ownership of the business in the event the owner leaves.
- Sole responsibility for the business falls on the owner, who may not have all the expertise necessary.
- Owners are considered self-employed and may be responsible for a variety of business taxes as a result.
FAQs
Do sole proprietors pay more taxes?
The owner of a sole proprietorship reports business profits and expenses on their income tax return, using Schedule C (Profit or Loss from Business). The income is subject to personal income tax rates, and the owner is responsible for paying self-employment taxes, which cover Social Security and Medicare contributions. This is often less than corporate tax rates would be.
Does it cost money to start a sole proprietorship in Connecticut?
Forming a sole proprietorship in Connecticut does not require any paperwork or fees – the business exists simply because the owner is doing business. However, most types of businesses will need to obtain a sales tax permit, which costs $100 and must be renewed every 2 years. If you want to use a trade name, that also costs $5.
Can I use a business name for a sole proprietorship?
Yes, Connecticut allows sole proprietorship to operate under something other than the owner’s own name. To do this, you will need to complete a trade name certificate with your town clerk and pay a $5 fee. You must also make sure the trade name meets all state naming requirements, including being totally unique in the state.
Can I have a bank account for a sole proprietorship?
Since you and your sole proprietorship are considered a single entity, you will not be able to open a business bank account in the business’s name. You can open a personal account dedicated solely to your own business assets, but it will remain under your personal name and Social Security Number. The same is true for credit cards and loans.
Can two people own a sole proprietorship?
By definition, a sole proprietorship has a single owner – a similar business with multiple owners is considered a general partnership. However, a married couple who files taxes jointly can own a sole proprietorship as a joint venture.
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