How to Start a Sole Proprietorship in New Mexico
If you live in New Mexico and want to start a business, a sole proprietorship might be a good place to start, as you can get your business up and running quickly and easily. Read on to learn more about a sole proprietorship and how to establish your small business in New Mexico.
What is a sole proprietorship?
A sole prop is an enterprise run and owned by a single person who sometimes has employees working under them. With this type of business, there’s no legal distinction between the person running the company and the business entity, which means you are personally responsible for the business. If, for example, your business is sued by a customer, you are financially responsible for all legal fees.
Examples of a sole proprietorship
- A local clothing store owned by a single person.
- A local grocery store
- A freelance writer working on a platform like Upwork.
- A freelance graphic designer
- A farmer who sells products at a local farmers market.
What qualifies your business as a sole proprietorship?
According to newmexico.gov, you can start a sole proprietorship if you own every asset of the business, from the business license to the legal structure. You are in charge of anything that happens to the company and take on debts. You are also not incorporated or working with any partners.
Sole proprietorship vs LLC
A sole prop is a business owned by one person who may occasionally have employees under their watch. There is no distinction between the person and the business, thus putting more responsibility on the owner.
An LLC, or limited liability company, is a private limited company and United States structure that defends the owner from personal responsibility for debts and liabilities. An LLC is more formal than a sole prop.
Who is it best for?
In New Mexico, a sole prop is best for those who have small businesses or contracts. They are easy to set up and take apart, making them practical choices for low-risk companies.
The larger your business grows, the more at-risk it is. Once you reach a medium to large business stature, investing in an LLC is a better choice to provide a better defense system for your assets.
How to set up a sole proprietorship in New Mexico
The first step to take when wanting to open a sole proprietorship in the state of New Mexico, according to the New Mexico Secretary Of State, is to simply begin working on your business.
As long as you aren’t opening a New Mexico LLC or other business formation, there is very little you need to do to start your sole proprietorship. Below are a few recommended steps that can help you make decisions, but note that there aren’t really any strict requirements other than getting a state tax ID number.
Is there any formal paperwork filed to establish this type of business?
New Mexico regulation does not require formal paperwork for an individual to start a sole prop. There is no setup and no fees required to register yourself and your endeavor in this business category.
Name your business
If you own a New Mexico business, one of the steps you need to take is to choose a name. Although it isn’t necessary, defining your business with a unique name will ensure it’s more established in your local community.
There are two routes available for naming your sole proprietorship in New Mexico. One involves using your legal name as the title, while the other requires choosing your business’s name as something of your creation in the state.
Using your own name
The general way to find your business name is to use your legal name as the definer of your entity. Unless you register otherwise, your business will be under your legal first and last name by default.
Although some people don’t love their legal name title, others may enjoy it. Freelance artists and writers, in particular, may benefit from a name that clarifies who they are, and putting their name on their work can help them promote their sole proprietorship.
If you don’t want to use your name as your business title, there is an alternative known as a DBA.
Setting up a DBA
If you want to create your own name, which isn’t your legal name, you can set up a DBA name or “Doing Business As”. This DBA is also called a trade name, and it can provide a distinction to your entity and allow you to personalize your business more than the standard naming system.
Most people choose to use the DBA as their sole proprietorship name because it provides an air of professionalism to potential customers. It might make your entity seem more trustworthy than one labeled under the legal first and last name of the owner.
Some states require businesses to register under a DBA, but New Mexico doesn’t. You just need to pick a name and begin working.
It’s also critical to be aware of the licensing department and understand any licensing requirements in the state. Under New Mexico regulation, there are no licensing requirements. Most owners do not need to meet any specific standards to establish their company.
However, it is vital to note that each industry may have differing requirements for their employees to work as sole proprietors, such as the medical or therapy industry. Bars often require a liquor license. You can find all this information from the New Mexico licensing department. Ensure you research your industry and complete any necessary legal steps to satisfy their requirements before proceeding.
Register for state taxes
Although no business license is required in New Mexico, your business will need to register with the local tax authorities. You can get a New Mexico TIN by heading to the New Mexico Taxation and Revenue Department website. You will need to choose a name prior to this step, otherwise be prepared to use your legal name.
Open a business bank account
Opening a business bank account isn’t required for a New Mexico sole proprietorship, but it can help to keep business and personal finances separate, especially if you have employees. Separate bank accounts can help you file taxes, too, since you can easily identify business income and expenses.
- Ease of setup and minimal cost to maintain
- Lack of owing corporate business taxes to the IRS
- No restrictions implemented from a formal business structure
- No need for items like a business bank account or annual reports/filings
- Simple to keep records
- Lack of liability protection for personal assets
- No constant business endeavors underway
- Tricky to bring in capital for your company
- Assumed less professionalism from outsiders
- No way to take on debt for the business
How do I establish myself as a sole proprietor in New Mexico?
You are a sole proprietor if you own all assets of a business in New Mexico. There is no need to pay filing fees or report your name to the local governing agency. However, if you want to pursue a different business setup, like starting an LLC, a registered agent may be helpful for additional steps, such as registering a name.
Can a sole prop have an EIN number in New Mexico?
In New Mexico, a sole prop can have an employer identification number or federal tax ID, but it’s optional. Like a social security number, an EIN is a valuable ID number, but it isn’t always handy unless you have multiple employees working for you.
What is the tax rate for a sole prop business in New Mexico?
If you’re a taxpayer worried about your personal tax return, what tax rate can you expect for New Mexico taxation on a sole prop business? Anyone engaged in business in New Mexico is subject to the GRT, which is 5.125%.
Does a sole proprietorship have to be a DBA in New Mexico?
For entrepreneurs that live in New Mexico, there is no requirement for them to register their business as a DBA. Owners can use either their legal or trade name to do business without needing to register their business in the state.
Does a sole proprietor need a payroll software program?
Startup businesses under the sole proprietor category do not need a payroll program if only one person works for them. However, a sole proprietorship may need a payroll program if they have multiple employees to pay. Payroll programs can help gather contact information and withhold payments like SSN taxes.
Is it better to start as a sole proprietor or LLC?
If you want to start an LLC, particularly a New Mexico LLC, there are some distinct advantages. You get more protections and defenses, meaning less liability. It’s also easier to report to the Internal Revenue Service. However, sole proprietorships are better if you work solo and don’t have many assets to lose, as they are easier to start.
How does a sole proprietorship pay taxes?
Business owners running a sole prop still are responsible for paying their owed money to the taxation and revenue department, but it looks a little different for them. Business tax, income tax, sales tax, and more are all reported and filed based on their personal tax return, also known as pass-through tax.
Sole props combine personal and business taxes into one report for the government. Owners will use Schedule C along with their 1040 to write everything down.
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