How to Start a Sole Proprietorship in Illinois
As a business owner, one of the first and most important decisions you will make is what business structure is the right choice for your venture. While there are a number of options in Illinois, one of the most popular is also the most simple: a sole proprietorship. The process to establish a sole proprietorship is uncomplicated and fast, but it is important for entrepreneurs to understand how this business structure works and what will be required of them.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business owned and operated by a single individual, which is considered to be the same legal entity for legal and tax purposes. The owner of this business is known as a sole proprietor and has complete control over the business, as well as assuming all responsibility and liability for business obligations.
Examples of a sole proprietorship
- Sally runs a small sandwich shop, where she cooks and serves the sandwiches. She is the sole owner and takes care of all business activity.
- John is a freelance videographer. He offers his services directly to clients and manages all aspects of his business independently.
What qualifies your business as a sole proprietorship?
A business is considered a sole proprietorship by default if it is being operated by an individual without formally registering it as any other kind of entity. So long as your business is run only by you and has not been incorporated or formed as a partnership, it is a sole proprietorship. You may already be running one without knowing it!
Sole proprietorship vs LLC
A sole proprietorship is the simplest form of a business entity, where the owner and the business are considered one entity. This offers a lot of flexibility, autonomy, and tax benefits for the owner – but does mean they assume unlimited liability for the business, which could put personal assets at risk.
An LLC (or Limited Liability Company) is a business structure that provides some liability protection to its owner or owners by forming a separate legal entity. LLCs still enjoy benefits like pass-through taxation but must meet more requirements than a sole proprietorship.
Who is it best for?
A sole proprietorship is usually the best fit for anyone who wants to start and run a business independently, with minimal need for legal formalities and a low initial cost. This typically suits small-scale ventures, freelancers, and anyone who wants complete control over their business.
Typically, a sole proprietorship will work well for a business that does not intend to scale to a large or complex organization. This may include local retail stores, online services, professional services, or any other small business.
How to set up a sole proprietorship in Illinois
While there is no formal paperwork required to form a sole proprietorship in Illinois, that doesn’t mean you’ll never have to complete any formalities. Running a new business may include some regulations you need to comply with or optional processes to follow. If you’re not sure where to start, these are some of the most important and common steps you can take.
Is there any formal paperwork filed to establish this type of business?
Unlike other business structures, a sole proprietorship requires no formal paperwork or registration through the Illinois Secretary of State. Businesses that meet the qualifications are automatically sole proprietorships. However, depending on your type of business and location, other formalities may be required to ensure proper licensing and compliance with other regulations.
Naming your business
You have the option to operate your sole proprietorship under your own name or to use a more public-friendly business name. The right choice may differ for each business, but it is important to understand what both mean for you.
Using your own name
Because the owner of a sole proprietorship is not considered a separate legal entity from the business itself, sole proprietorships are automatically operating under the owner’s legal name. You do not need to take any steps for this to be true, and you can file taxes under the same name (and Social Security Number) with no formalities.
This is often the best choice for those performing professional services who will be using their name anyway. There is also no requirement that these names are unique, which can remove some barriers.
Setting up a DBA
If you want to use a name other than your own, Illinois allows for sole proprietorships to obtain an assumed business name. The company can then continue doing business as that assumed name, which may be more descriptive or friendly. These names need to follow Illinois’s general naming rules, which means you should check to be sure the name is not taken through the Illinois Secretary of State website.
Illinois law then requires sole proprietorships to register their assumed name through the local county clerk’s office. You will need to identify the county clerk where your business operates and follow their instructions for applying, as well as pay their designated filing fee.
Illinois business licenses
Some states require every business to have a general business license, but Illinois does not. However, if a sole proprietorship is selling any taxable goods or services, they will need to obtain a Certificate of Registration. This allows the business to collect sales tax and registers them to pay it to the Illinois Department of Revenue appropriately.
It is also possible that certain professions and industries will need specific licenses, to do things like sell alcohol or provide medical services. Each local government also has their own regulations surrounding business licenses, permits, zoning clearances, and other requirements, so it is important to contact your local officials.
Because a sole proprietor and their business are considered the same legal entity, the process of filing personal income taxes is simplified. The owner will include all business income and expenses on their personal tax return, filing a Schedule C as a part of their Form 1040 filing. These will be calculated as a part of net income and be subject to the individual tax rate otherwise applied.
Sole proprietors are considered self-employed and may have to pay self-employment taxes, which include coverage for Social Security and Medicare taxes. This is all done under the owner’s personal Social Security Number, rather than using a business tax ID number.
- Simple setup with minimal paperwork or cost
- Complete control over all business decisions
- Benefits of pass-through taxation
- Simple tax filing process
- Unlimited personal liability is taken on by the business owners
- Trouble obtaining funding, including access to business bank accounts
- Less credibility in some public perceptions
- All responsibility falls on a single owner
Can a sole proprietor in Illinois have employees?
Yes, sole proprietorships are able to hire employees. To do so, they will need to obtain an Employer Identification Number (EIN) through the Internal Revenue Service (IRS) website and pay the appropriate withholdings for federal tax payments. It may also be helpful to have workers’ compensation insurance in place, if not required.
Will Illinois let me convert a sole proprietorship to an LLC?
If your business grows or you want to move toward another structure, there is a process to convert it within Illinois. You will essentially form this new entity and roll your previous business activities into it, as well as carry over licenses and trade names as needed.
Can I have a partner in a sole proprietorship?
By definition, a sole proprietorship has a single owner. If there are multiple owners, a general partnership is similar but allows for this. A possible exception is if you want to start a business with your spouse as a joint venture, which can still be considered a sole proprietorship if it is qualified as such.
Can my sole proprietorship have a name beside my own?
Yes, in Illinois, a sole proprietorship can register an assumed business name. They can then operate under this name for marketing and other purposes. This is done by filing with the local county clerk’s office where your business is located. Each county will have its own forms and requirements, as well as its own filing fee.
Do I need licenses to run a sole proprietorship in Illinois?
There is no general license, but each business may have different requirements. Most Illinois businesses will need a Certificate of Registration to collect and pay sales taxes and use tax. You may also need certain permits to work as a professional in some industries, and local governments can require their own licensing and permits.
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