How to Start a Sole Proprietorship in New Jersey
If you’re considering launching your own startup in New Jersey, the Garden State offers a fertile landscape for entrepreneurs, with a vibrant economy, prime location, and a multitude of resources and support systems. One of the most popular and accessible businesses in the state sole proprietorship. This comprehensive guide will walk you through the essential steps to set one up.
What is a sole proprietorship?
A sole proprietorship is a type of business structure where an individual operates their business as the sole owner and decision-maker. The owner retains full control over the business’s operations, profits, and decision-making processes.
In this structure, there is no legal distinction between the individual and the business entity. As a result, the owner assumes unlimited personal liability for the business’s debts and legal obligations, meaning their personal assets can be at risk.
For instance, if your business is sued by a customer, you may be required to pay legal fees out of your personal savings account.
Examples of a sole proprietorship
Anyone who is conducting business activity under their name is a sole proprietor – this means if you are a freelancer who offers services, your business is an example. A sole proprietorship can also represent a retail store, online products, and services, or any small business run by an individual. Often, professionals like accountants or hair stylists are sole proprietors.
What qualifies your business as a sole proprietorship?
If an individual owns and operates their business, and it has not been formed as a separate legal entity, it qualifies as a sole proprietorship. There are no other standards or thresholds it must meet, so long as it is their business and not formed as another type of business, like through incorporation.
Sole proprietorship vs LLC
A sole proprietorship is a simple and unincorporated business structure that is formed when an individual operates a business alone and under their name. Because the owner and the business are considered a single legal entity, the owner receives all profits but also takes on unlimited personal liability.
An LLC (Limited Liability Company) is a business structure in which the business becomes a separate legal entity from its owner or owners (called members). This type of business allows for legal protections for the owner while remaining eligible for pass-through taxation.
Who is it best for?
A sole proprietorship is often the best choice for small-scale or home-based businesses that have low-risk activities and minimal liabilities. It offers a simple and cost-effective setup, providing full control, autonomy, and flexibility in decision-making.
If you have limited start-up capital, prefer to maintain privacy, and anticipate the need for quick adaptations to market changes, a sole proprietorship can be a suitable option. However, it’s important to evaluate your specific circumstances and consult with professionals to ensure it aligns with your own business goals and needs.
How to set up a sole proprietorship in New Jersey
Sole proprietorships are known for being fast and inexpensive to establish, with no formal steps required to start the business. However, like any business, there may be other regulations you need to follow in order to remain a legal operation in New Jersey, and others you can choose to follow if necessary.
Is there any formal paperwork filed to establish this type of business?
Establishing a sole proprietorship does not require any formal paperwork to be filed. Simply conducting business activity under your own name is enough to establish a sole proprietorship.
Name your business
One of the biggest questions surrounding sole proprietorships is what you can name the business. In New Jersey, you have the option of using your own legal name or setting up a Doing Business As.
Using your own name
As a sole proprietor, you have the right to operate your business under your legal name without any additional steps. For example, if your name is John Smith and you plan to offer graphic design services, you can simply operate as “John Smith.” This is often the best choice for startups or those offering professional services without employees.
Setting up a DBA
If you would like to use a name other than your own, New Jersey allows this through the process of registering a Doing Business As or a trade name. You will need to choose a name that meets all state requirements, including being a unique name at the state level and then file the appropriate paperwork. This is done through the town or county clerk’s office where your business operates and can have a varying filing fee.
New Jersey licenses
All businesses, including sole proprietorships, in New Jersey must obtain a Business Registration Certificate. This can be done through the Division of Revenue and Enterprise Services for no fee. Additionally, any business that sells or leases a taxable good in New Jersey must obtain a Certificate of Authority in order to collect and remit sales tax.
Your local government may also have its own requirements for business licenses and zoning clearances, so it is important to check with your county clerk.
Consider an EIN
An EIN, or employer identification number, is required if you plan to hire employees or open business bank accounts. An EIN is issued by the IRS and is issued instantly after answering a few questions online. The nine-digit number is used as a tax ID, much like your social security number is.
If you don’t plan to hire employees or open business accounts, an EIN isn’t necessary.
- Owners retain complete control of all business decisions
- There is little to no cost to form and maintain the business
- Pass-through taxation makes filing simple and avoids hefty corporate tax rates
- These small business owners receive all of their profit and do not have to answer to shareholders, partners, or board members; the same is true of business assets
- There is no requirement to publicly disclose finances
- Unlimited liability for business debts and obligations, which can put personal assets at risk
- Being the sole owner of a sole proprietorship requires expertise and resources that can be overwhelming for a single person
- Self-employment taxes can cut into business profit
- It may be more difficult to obtain investors, loans, or a business bank account
Can I convert my sole proprietorship into a different business structure in the future?
Yes, as your business grows, you can convert your sole proprietorship into a different business structure, such as a partnership, LLC, or S corp, if it aligns with your goals and needs. You will need to file the appropriate paperwork in order to do so.
Do I need to register my sole proprietorship for sales tax purposes in New Jersey?
If your business involves selling taxable goods or services, you are generally required to register for a Sales and Use Tax Certificate of Authority with the New Jersey Division of Taxation. You will not need to register for a tax ID number or anything similar and can use your personal Social Security Number.
How do I apply for an Employer Identification Number (EIN) for my sole proprietorship?
As a sole proprietorship, you are not required to have an EIN unless you have employees. If needed, you can apply for an EIN with the Internal Revenue Service (IRS) through their website. There is no cost to getting an EIN.
How do I choose a name for my sole proprietorship in New Jersey?
A sole proprietorship automatically operates under your legal name. But if you want to use another business name, you can choose any name for your sole proprietorship as long as it’s not already registered by another business in New Jersey. You may conduct a name availability search on the New Jersey Business Gateway Services website.
What are the advantages of operating as a sole proprietorship in New Jersey?
Some advantages include ease of formation, complete control, and decision-making authority, and simplified reporting for individual taxes. Being a sole proprietor also allows you to keep all of the profit from your business without answering to shareholders or a partner and avoids business taxes.
Do I need to file any business forms or documents to start a sole proprietorship in New Jersey?
New Jersey does not require any paperwork to formalize the existence of the business. However, you will need to file paperwork for any necessary permits and licenses, as well as if you choose to use a trade name.
How does a sole proprietorship pay taxes?
To fulfill tax obligations as a sole proprietor, the individual needs to file a Schedule C with their personal income tax return. The Schedule C form is used to report the business’s income, expenses, and profits.
Does a sole proprietor pay self-employment taxes?
Self-employment taxes, which include both the employer and employee portions of Social Security and Medicare taxes, must be paid. As a sole proprietor, the individual functions as both the employer and employee, assuming responsibility for paying both halves of the self-employment tax.
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