How to Start a Sole Proprietorship in Montana

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by LLC.org Team
Last updated: June 13th, 2024
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Starting a sole proprietorship in Montana offers entrepreneurs a straightforward path to establishing their own businesses. With minimal paperwork, tax flexibility, and the ability to operate under their own name or a DBA, sole proprietors can embark on their entrepreneurial journey and pursue their business dreams.

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What is a sole proprietorship?

A sole proprietorship is a type of business structure where an individual owns and operates a business as a single entity. It is the simplest and most common form of business ownership, particularly for a small business, a freelancer, and an entrepreneur. Unlike other business structures such as a corporation or limited liability company (LLC), a sole proprietorship does not create a separate legal entity from the owner.

Examples of a sole proprietorship

Sole proprietorships encompass a wide range of businesses. Some examples of sole proprietorships in Montana could include small business owners, a local coffee shop owned and operated by a single individual, a freelance graphic designer providing design services, or a home-based business selling handmade crafts online. The flexibility of the sole proprietorship structure allows entrepreneurs to pursue various business activities.

What qualifies a business as a sole proprietorship?

To qualify as a sole proprietorship, a business or startup must be owned and operated by a single individual without any partners or co-owners. It is an unincorporated business where the owner is personally responsible for all business assets, debts, and liabilities.

Sole prop vs LLC

While a sole proprietorship offers simplicity and ease of operation, it lacks the legal protections that an LLC provides. In a sole proprietorship, the owner has unlimited personal liability for the business’s debts and obligations. On the other hand, an LLC separates the owner’s personal assets from the business’s liabilities, providing limited liability protection.

How to set up a sole proprietorship in Montana

Setting up a sole proprietorship in Montana is relatively straightforward. Once you have the business plan and figured out how to make money, the first step is to choose a business name. The owner has the option to operate under their own name or register a DBA if they prefer a different business name. 

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

No formal paperwork needs to be filed to establish a sole proprietorship in Montana. Unlike other business structures, such as corporations or LLCs, there are no specific formation documents required. The business owner can simply start operating under their own name or choose a “Doing Business As” (DBA) name and register it with the Montana Secretary of State’s office.

Name your business

It is important to ensure that the chosen business name is unique and not already in use. A search on the Montana Secretary of State’s website or using their business name database can help verify name availability.

Using your own name

Operating under your own name is the simplest way to run a sole proprietorship. If your name is John Smith and you decide to start a business as a sole proprietor, you can simply operate as “John Smith” without needing to register a separate business name.

Although some people find it more trustworthy to do business or purchase goods from a business that operates under a different name, there are some circumstances when using your own legal name is better. 

For example, if you want to build a personal brand and products that you created yourself and don’t want to use a different name, it could be ideal to use your own name instead. Plus, you wouldn’t have to go through all the paperwork of filing for a DBA. 

Setting up a DBA

If you prefer a different business name, you can establish a DBA. A DBA, or “doing business as,” allows you to operate under a name other than your own. To register a DBA in Montana, you would need to file the appropriate forms and pay the required fees with the Montana Secretary of State’s office.

You can download the DBA form here and visit the local county clerk’s office for filing, which costs $20. Or you can file online, which is one of the quickest ways to file and acquire your assumed business name certificate. 

Research state licenses

Certain professions and industries in Montana may require specific licenses or permits to operate legally. It is crucial to research the licensing requirements for your type of business and contact the relevant state agencies or local authorities to ensure compliance.

For example, if you are a barber, accountant, notary public, or practice other professions that may require a license from the Department of Commerce in Montana, you will need to get the necessary permits to operate legally.

Other permits will include zoning permits and permits to sell liquor and tobacco if you are thinking about opening a convenience store or mini grocery. If you are not sure what licenses and permits your business needs, you can visit the Montana Department of Commerce Website, where you can learn what state licenses you need to operate. 

Pros

  • It is easy and affordable to set up and is one of the most cost-effective solutions for small and new businesses
  • As the sole owner of the business, you have complete control over business activity allowing you to implement your vision for the business
  • Tax payments and reporting are simple and straightforward since you only need to file each term under your personal social security number
  • You have direct access to all the profits without needing to share the earnings with co-owners and shareholders
  • This type of business entity has minimum compliance requirements

Cons

  • You have unlimited liability over business debts and legal obligations
  • If your business gets sued, you are personally being sued
  • Accessing capital from lenders can be challenging for sole proprietors
  • Sole proprietorships have limited business growth potential
  • Sole proprietors might find it difficult to attract talented employees because of the limited benefits and wages they offer

FAQs

How does the individual tax structure work for sole proprietorships in Montana?

As a sole proprietor in Montana, the business’s income and expenses are reported on your personal tax return using Schedule C. You are subject to personal income tax rates, and you are responsible for paying self-employment taxes, including Social Security and Medicare taxes, on the business’s net income.

Can a sole proprietorship in Montana hire employees?

Yes, a sole proprietorship in Montana can hire employees. However, when you hire employees, you will have additional responsibilities such as withholding and remitting payroll taxes, providing workers’ compensation insurance, and complying with state and federal employment laws. Plus, you need to obtain an employer identification number from the IRS.

What are the personal liability implications for the owner of a sole proprietorship in Montana?

As the sole proprietor of a business in Montana, you have unlimited personal liability for the business’s debts and obligations. This means that your personal assets, such as your home or savings, can be used to satisfy business-related debts or legal claims.

Are there any restrictions on the types of businesses that can operate as sole proprietorships in Montana?

Generally, sole proprietorships can operate in various types of businesses in Montana. However, certain professional occupations may have specific licensing requirements or regulations that need to be met.

What are the reporting and compliance requirements for sole proprietorships in Montana?

Sole proprietorships in Montana are required to maintain accurate records of their business transactions and financial activities. It is important to keep track of income, expenses, and any necessary documentation for tax purposes. Additionally, depending on the nature of the business, there may be specific reporting or compliance requirements at the state and local levels.

How can a sole proprietor in Montana transition to a different business structure, such as a partnership or corporation, if desired?

If a sole proprietor in Montana wishes to change the business structure, they can choose to form a partnership or incorporation. This typically involves filing the necessary formation documents with the Montana Secretary of State’s office and complying with the specific requirements for the chosen business structure.

Can a sole proprietorship open a business bank account?

Yes, if you filed for an assumed name in Montana, you can now open a business bank account under your DBA. To do so, you’ll likely need an EIN, which is a nine-digit number issued online by the IRS.

How does a sole proprietorship pay taxes?

For tax purposes, a sole proprietorship’s business income and expenses are reported on the owner’s personal tax return. The owner must file a Schedule C with their individual income tax return to report business profits or losses. A sole proprietorship is subject to personal income tax rates, and the owner is also responsible for paying self-employment tax, including Social Security and Medicare taxes, on the business’s net income.

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