How to Start a Sole Proprietorship in Maryland

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by LLC.org Team
Last updated: June 13th, 2024
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If you have a solid business plan that supports a viable business, you can start a sole proprietorship. Although there is not a lot of paperwork involved in becoming a sole proprietor, there are some optional steps you can take to set yourself up for success. This article will guide you on the proper ways to start a small business and help you determine whether a sole proprietorship is the right business structure to choose as you try to navigate the world in the shoes of a real entrepreneur. But first, what is a sole proprietorship?

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What is a sole proprietorship?

A sole proprietorship is an unincorporated business. If you solely own a Maryland business with no other business owners or shareholders involved, it can be considered a sole proprietorship. It is an incorporation that has minimal regulations from the state and local government.

As a sole proprietor, you are entitled to all business profits. However, you are also personally liable for all business debts. With no liability protection for Maryland business expenses and debts, your personal assets could be at risk.

In the state of Maryland, many successful business owners and small businesses start as sole proprietorships. Not only is it the easiest way to start a business, but it is also the cheapest way. If you don’t have enough capital or don’t have an idea for a large business, you can pave the way and become one of Maryland’s new small business owners. 

Examples of a sole proprietorship

Some examples of sole proprietorships are local clothes stores, local shops, liquor or grocery stores, and other one-person-owned small businesses. Other examples can be self-employed freelancers such as graphic designers, content writers, and virtual assistants.

What qualifies your new business as a sole proprietorship?

Any small business can become a sole proprietorship as long as it is owned and operated by one person. A sole proprietorship cannot be owned by two or more people, so if that is the case, you might want to consider getting incorporated or filing for an LLC, general or limited partnership, or limited liability company. 

Other business structures, like an LLC, allow limited liability and offer legal protection for your personal assets, which means it safeguards your assets from bankruptcy or lawsuits.  

Sole prop vs LLC

A Sole proprietorship is owned and operated by one person. However, a single member LLC can also be owned by one person. Well, the difference is that LLCs have limited liability protection, whereas sole proprietors don’t have that luxury.

Who is it best for?

If you prefer a simple business structure when starting a business and want to start immediately, a sole proprietorship is the best option for you, especially if you have a small business idea in mind that qualifies for a sole proprietorship. 

With that in mind, any business entity or structure has its upsides and downsides. With a good business plan and even better execution, starting as a sole proprietor is one of the best options for freelancers and independent contractors to create and start building a business from the ground up. 

How to set up a sole proprietorship in Maryland

Setting up a sole proprietorship in Maryland is easy. Without the need to register with the secretary of state, you can start operating your small business almost immediately. However, there are some steps you might want to take to help your business grow and gain more potential customers. So let’s start off with one of the most important things, which is naming your business. 

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

In Maryland, sole proprietorships do not need to register with the Maryland Department of Assessments and Taxation, meaning you don’t have to pay a separate business tax. Since you are paying all the business taxes using your personal income tax return and social security number, there is not a lot of paperwork needed if you want to start a sole proprietorship.

However, there are optional steps that require paperwork, such as filing for a trade name and some mandatory business licenses that depend on the type of your business.

You can also get an EIN or employer identification number, which is also known as a Federal Tax ID Number. Having one of these allows you to hire employees and provide them with benefits such as W-2s for tax purposes and other employee benefits.

Naming your business

Naming your business isn’t really required for sole proprietorships. However, having a business name can add more appeal to your business and lets other people know instantly what your business is all about. 

Using your own name

You can stick to using your own name, which is an excellent option for some businesses, especially if their goal is to build a personal brand. Let’s say you are a web designer or writer, and you want people to remember your name, you don’t need a separate business name.

However, using your own name might not be the best move for all types of businesses, and if that is the case, you can use a DBA, or Doing Business As.

Setting up a DBA

If you want to do business as or under a different name, you can file for a trade name in the state of Maryland. It is a crucial part of many sole proprietorships. Although it is not required, it is a must if you want to use a different name for your business. 

To file for a trade name, you can check the availability of the name you are seeking to use using Maryland’s business entity search tool, which is like a search engine for business names in Maryland.

Now that you have used the search tool and the name is available for you to use, you can file for a trade name online using the Maryland Business Express website or download this form and submit the application by mail. The filing fee costs $25, with an additional $50 if you want to expedite the process. 

State licenses

Some businesses, even sole proprietors, need to get the necessary state business license or licenses in order to operate legally in Maryland. Some professions, like barbering, accounting, veterinary medicine, etc., need a specific license to practice their business activity. 

Other licenses include organizational licenses, such as selling tobacco, liquor, gas, and other regulated products. If you are not sure what your permits business needs, you can go visit Maryland’s OneStop Portal, which has all the information you need about business permits and licenses. Plus, you can also use the portal to apply and get the permits you need all in one place. 

Maryland taxes

A sole proprietorship pays taxes through a personal tax return. However, instead of using a W-2 for employees, the Internal Revenue Service will ask you to use a Schedule C to calculate your business income, business expenses, all the cost of goods and services your business sold, and other taxation requirements of the IRS.

Pros

  • You get to be the owner of a business
  • You get to keep all the profits
  • The startup costs are low
  • You have maximum privacy for your business
  • It is quick and easy to set up
  • You can switch to a different business structure later if you expand

Cons

  • Owners have unlimited liability for debts
  • There is no legal distinction between private and business assets
  • All the responsibilities of the operation fall on the owner

FAQs

Can you get funding for a sole proprietorship in Maryland?

Sole proprietors cannot have partners or shareholders because it is not a corporation or general partnership. However, you can still get funding by borrowing money from lending companies or from family and friends.

Can you hire employees for your sole proprietorship in Maryland?

Yes, sole proprietorships can hire employees if needed. However, you must obtain an EIN or employer identification number from the IRS, which is quick and easy to obtain online through their website. 

What is the biggest issue with owning a sole proprietorship?

The biggest issue with owning a sole proprietorship is that there is no clear or legal distinction between business and personal assets. With that said, the owner has full liability if the business goes bankrupt because of debt. 

Are sole proprietorships easy to manage?

It depends on the nature of your business. It is easy to manage because there are hardly any employees to manage. But at the same time, it could be challenging because you are doing it all on your own. 

When is a sole proprietorship the best business structure?

A sole proprietorship is the best business structure if you want to start doing business fast and if you have limited capital.

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