How to Start a Sole Proprietorship in Indiana

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by LLC.org Team
Last updated: June 13th, 2024
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With its favorable business environment and straightforward regulations, Indiana provides a promising landscape for aspiring entrepreneurs. In this article, we will guide you through the essential steps and important considerations to help you launch your sole proprietorship successfully in the Hoosier State. Let’s dive in and explore the path to establishing your Indiana business.

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What is a sole proprietorship?

A sole proprietorship is a type of business structure where an individual operates and owns the business entirely on their own. It is the simplest and most common form of business ownership, often chosen by small business owners and self-employed individuals. As a sole proprietor, you have full control over decision-making, bear all the profits and losses, and are personally liable for any debts or legal obligations of the business.

Examples of a sole proprietorship

A sole proprietorship can encompass a wide range of businesses. Some common examples include a freelance writer offering writing services, a local bakery owned and operated by a single individual, a sole proprietor providing consulting services, a landscaping business run by a sole owner, or a self-employed graphic designer offering design services to clients. The key characteristic is that the business is owned and operated by a single individual without a separate legal entity.

What qualifies your business as a sole proprietorship?

A business qualifies as a sole proprietorship when it is owned and operated by a single individual without any formal legal entity established. In this structure, the owner is inseparable from the business, and there is no legal distinction between personal and business assets and liabilities. The business and the owner are considered one and the same.

Sole proprietorship vs LLC

A sole proprietorship is an unincorporated business structure where a single individual owns and operates the business, and there is no legal distinction between the owner and the business entity. It offers simplicity and full control to the owner, but they are personally liable for all business debts and obligations.

An LLC, short for Limited Liability Company, is a business structure that combines the flexibility of a general partnership or sole proprietorship with the limited liability protection of a corporation. It provides personal asset protection to its owners (known as members) and allows for pass-through taxation, where profits and losses are reported on the members’ personal tax returns.

Who is it best for?

A sole proprietorship is the best choice for individuals seeking a simple and cost-effective business structure that provides full control and flexibility. It is particularly well-suited for:

If you have a business idea and want to bring it to life quickly and easily, a sole proprietorship is ideal. It eliminates the need for partners or complex legal procedures, allowing you to start your venture promptly and make independent decisions.

Sole proprietorships are well-suited for professionals offering specialized services, such as consultants, freelancers, or personal trainers. With a sole proprietorship, you can establish direct relationships with clients, focus on delivering high-quality services, and adapt swiftly to meet their needs. The low overhead costs and simplified tax reporting further make it an attractive choice for small-scale service providers.

How to set up a sole proprietorship in Indiana

Before diving into the process of setting up a sole proprietorship in Indiana, it’s important to understand the initial steps involved in establishing your business. While the formation of a sole proprietorship has no necessary paperwork, there are some optional and required considerations to keep in mind as you form your new business.

Is there any formal paperwork filed to establish this type of business?

Unlike other business structures, such as corporations or LLCs, establishing a sole proprietorship does not require filing formal paperwork with the state. In most cases, you can simply start operating your business under your own name or choose a “Doing Business As” (DBA) name, if desired. However, depending on your location, you may need to obtain the necessary licenses or permits specific to your industry or locality.

Naming your business

Depending on how you want to run your business and your marketing and business plan, you may want to use a hand-picked name, or you can choose the simple route of using your name as the default. It is important to understand what each decision may mean and require. 

Using your own name

For a simple and straightforward option, you can keep the business name as its default of your own legal name. Since a sole proprietor and their business are considered the same legal entity, they share a name and a Social Security Number in place of a tax ID, and there is no requirement to change this – simply keep managing all business activity under your name. 

Setting up a DBA name

For some businesses, it may make more sense to use a public-facing name that better fits your services and appeals to clients, sometimes called an assumed name or trade name. To do this in Indiana, you will need to file a certificate of assumed business name through the county recorder’s office where your business is located. The form is the same across counties, but filing fees can vary. The Indiana Secretary of State’s website (called InBiz) can help you locate the proper county recorder. 

If you choose to use an assumed name, it is important to follow all Indiana state requirements for a business name. This means you cannot use the name of another business in the state, and the name cannot be misleading in any way.

Indiana licenses 

While there is no state-level general business license required in Indiana, most businesses will need to obtain a Registered Retail Merchant Certificate or a seller’s permit. This allows any business that provides taxable goods or services to collect sales tax and pay it to the Indiana Department of Revenue. 

Additionally, things like the type of business you run and your location may dictate if any other licenses are needed. Certain professions will need to obtain separate licensing, and local governments can set their own rules around business licenses and zoning clearances. It is important you check with the Indiana Professional Licensing Agency and your local county recorder’s office to understand any requirements for your business. 

Indiana taxes

For tax purposes, a sole proprietorship is not separate from its owner. The business’s income and expenses are reported on the owner’s personal tax return using Schedule C, which is filed along with their individual tax return (Form 1040). The owner is responsible for paying self-employment taxes, which include Social Security and Medicare taxes, based on their business income. Additionally, estimated quarterly business tax payments may need to be made to the IRS throughout the year.

Pros

  • Setup and operation involves minimal formalities and paperwork, making it easy to start and manage.
  • As the sole owner, you have complete control over decision-making and business operations.
  • Sole proprietors can enjoy certain tax advantages, such as the ability to deduct business expenses on their personal tax returns.
  • Great flexibility in terms of adapting to changing business needs and adjusting operations.
  • The cost of starting and maintaining a sole proprietorship is typically lower compared to other business structures.
  • Greater privacy, as there is no requirement to disclose financial or operational information to the public.

Cons

  • The owner is personally responsible for all business debts and legal obligations. This means your personal assets could be at risk if the business faces financial difficulties or legal issues.
  • Difficulty financing or raising startup capital compared to other business structures, or even opening a business bank account.
  • The structure of a sole proprietorship may pose limitations on the growth and scalability of the business. Without additional owners or investors, it can be more challenging to expand operations or take on larger projects.
  • The owner bears the burden of all decision-making and day-to-day operations. This can be overwhelming and may require a lot of expertise.

FAQs

Can I convert my sole proprietorship into another business structure later?

Yes, it is possible to convert your sole proprietorship into another business structure, such as an LLC or corporation, if desired. This typically involves filing the necessary formation documents and complying with state requirements for the new entity. Consult with an attorney or business professional to ensure a smooth transition.

Can I have partners or co-owners in a sole proprietorship?

No, a sole proprietorship, by definition, is owned and operated by a single individual. If you plan to have partners or co-owners, you would need to consider alternative business structures, such as a partnership, LLC, or corporation, which allow for shared ownership and management.

Am I personally liable for my sole proprietorship’s debts?

Yes, as a sole proprietor, you have unlimited personal liability for business debts and legal obligations. This means your personal assets may be at risk if the business faces financial or legal issues.

How do I choose a name for my sole proprietorship?

Choose a name that reflects your business and aligns with your branding. If you plan to operate under your own name, no additional steps are needed. For a different name, register a Doing Business As (DBA) with the Indiana Secretary of State or county clerk’s office.

What taxes do I pay as a sole proprietor?

As a sole proprietor, you pay income tax on business profits by reporting them on your personal tax return (Form 1040) using Schedule C. You’re also responsible for self-employment taxes, which include Social Security and Medicare taxes. Pay estimated federal taxes quarterly to stay compliant with the IRS.

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