How to Start a Sole Proprietorship in Hawaii
Small business owners in Hawaii can easily start and operate sole proprietorships. To own and operate a sole proprietorship, the owner must have the licenses and permits that are required by law to operate the business and register for a tax identification number with the Hawaii Department of Taxation. Ready to learn more? Here’s what entrepreneurs should know about setting up a sole proprietorship in Hawaii.
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What is a sole proprietorship?
A sole proprietorship is not a corporate entity. It is a business owned and operated by one person. The business is not a separate legal entity from its owner.
Examples of a sole proprietorship
A wide variety of businesses are operated as sole proprietorships. For example, as a sole proprietor, you can provide services in the areas of tow truck driving, private tutoring, copywriting, graphic design, landscaping, computer programming, software development, IT consulting, and bookkeeping.
What qualifies your business as a sole proprietorship?
A business that is not registered with the state or federal government, an unregistered business entity, that is owned and operated by one person is a sole proprietorship.
Sole proprietorship vs single-member LLC
A sole proprietorship is an unregistered business owned and operated by one person. The owner is liable for all financial and legal obligations of the business. In other words, there’s not protection granted to personal assets.
Single-Member limited liability companies (LLCs) are registered business entities that provide some financial and legal liability protection to their owners.
Who is it best for?
Sole proprietorships are great for people who want to start a new business, limit their financial investment, and control every aspect of their business. This type of business is usually self-financed and doesn’t require lots of paperwork to be filed (e.g., articles of incorporation, bylaws, business tax returns). Moreover, you can easily shut down your business if things are going badly, or you want to take a break.
Sole proprietorships are also ideal for people who want to intermittently operate their business. This allows them to treat it as a hobby or only operate it during certain times of the year. It may be the best option for people who must bootstrap their business too.
How to set up a sole proprietorship in Hawaii
Is there any formal paperwork filed to establish this type of business?
While there is no state registration, sole proprietorships must register for a Hawaii tax ID number via the Hawaii Department of Taxation.
If you decide to operate your business under a fictitious name, you must file a Doing Business As (DBA) application and pay the $50 filing fee.
Your business may also be required to file formal paperwork to get licenses and permits. If your business requires specific licenses and permits that are mandated by federal, state, county, or city/town laws, you should acquire them before you begin conducting business.
Interested in setting up a sole proprietorship in Hawaii, take the following steps:
Naming your business
You can run your business under your own name or you can come up with a business name.
Using your own name
Many sole proprietors use their own names as the name for their business. If you do this, you don’t need to register the business’ name.
Setting up a DBA
When choosing a trade name for your business, you have options. You can brainstorm names for your business or use name generators to help you.
After selecting the business’ name, do a name search on the Hawaii Business Express website to make sure that it’s available, and that there are no potential problems with it.
When you’ve settled on a name, you’ll file a Trade Name, (also known as Doing Business As, or a DBA) with the state. Registration of trade names can be done by filing the Application for Registration of a Trade Name on the Hawaii Business Express website, via the Hawaii Department of Commerce and Consumer Affairs website, or by downloading the Application for Registration of Trade Name and submitting the hard copy.
How to Check if a Business Name is Taken
State licenses
In Hawaii, sole proprietors are not required to purchase a general business license. However, you may need to obtain other licenses and/or permits in order to legally operate your business.
It is your duty to know which licenses and permits you are required to have, as mandated by state, county, and city/town law. You may want to contact your local business bureau or industry organization(s) to find out if there are any specific permits and licenses you need to have when you begin operating your business.
Register with the state taxation department
Sole proprietors must register for a tax license. You can get a Hawaii tax identification number from the Hawaii Department of Taxation.
When filing your federal tax return, you should use your personal Social Security number, unless you have an EIN for your business.
Open business accounts
Your sole proprietorship becomes a business when you engage in business transactions. As a business owner, you should keep your business and personal finances separate. The easiest way to do this is to open business bank accounts and lines of credit. Ideally, you’ll have at least two bank accounts, a checking account for your expenses and income, and a savings account for your anticipated tax payments. In addition, you should have at least one credit card that is only used for business transactions.
Get an EIN
To open a bank account, you’ll need an EIN, which is free and available online or by mail.
You can open business bank accounts and lines of credit using your EIN. If you don’t have an EIN, then you should open separate bank accounts and lines of credit that are only used for your business.
By setting up separate business bank accounts, lines of credit, and a business bookkeeping system, you are establishing your business as a commercial entity. Also, if you apply for a business loan, you are more likely to get it if you can provide organized business financial data to potential lenders.
Hawaii taxes
Sole proprietorships are not legally separate entities from their owners and will pay taxes via personal tax returns. This type of taxation is called pass-through taxes, where the business’ financial data is listed on the owner’s Internal Revenue Service (IRS) Form 1040-C.
Pros
- You control, run, and decide everything.
- All the profits from the business go directly to you.
- It has low startup costs.
- It gives you the maximum amount of privacy because you are not required to explain your decisions, operations, or business activities.
- Sole proprietorships can change their organizational structure at any time.
- Sole proprietorships can be easily shut down.
Cons
- You are responsible for the business’ debts, losses, and liabilities.
- Your ability to raise capital for your business is limited because your business is unincorporated.
- Being the sole owner and operator of a business can be extremely stressful, tiring, and overwhelming.
- It is challenging to hire and keep high-caliber employees.
- It can be very difficult for you to make time for family, friends, and leisure activities.
- For tax purposes, you are operating the least tax-friendly business type.
FAQs
Do sole proprietorships need an EIN?
Sole proprietorships need an EIN if they plan to open business bank accounts or hire employees. The business will have to withhold their employees’ taxes and pay their Social Security and Medicare contributions. If the only person working for and paid by the business is the owner/operator, then no EIN is needed.
Does a sole proprietorship have to be registered with the state of Hawaii?
No, there is no requirement that a sole proprietorship be registered with the state of Hawaii. However, the business must get a tax identification number from the Hawaii Department of Taxation.
Is a business trade name the same as a DBA for sole proprietorships in Hawaii?
A business trade name is the name that it uses when engaging in commercial transactions. The DBA, Doing Business As name, is a fictitious name that a business uses as its trade name.
How can sole proprietorships limit their financial and legal liabilities?
Sole proprietors can limit their financial and legal liability by purchasing general business liability, business interruption, and healthcare insurance. If they sell products, they can purchase product liability insurance.
What kinds of taxes are sole proprietorships expected to pay?
Sole proprietorships are expected to pay the same business taxes as incorporated businesses. Their owners must pay sales tax, taxes on their business income, and employment taxes on any money paid to the owner/operator.
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