How to Start a Sole Proprietorship in North Carolina
A sole proprietorship is the simplest form of business entity, and starting one can be quite exciting and rewarding, especially if you are a first-time entrepreneur with a good idea for a startup. If you are considering establishing a sole proprietorship in North Carolina, you can use this article as your guide to being a new business owner and sole proprietor.
What is a sole proprietorship?
Before we get to the part on how to establish this type of business, let’s define what a sole proprietorship actually is. A sole proprietorship is an unincorporated business with a single owner who owns, operates, and makes all the decisions for the business.
In sole proprietorships, the owner and the business are considered the same legal entity, meaning that the owner is personally liable and responsible for all the debts incurred by the business.
With that said, the owner is also entitled to all business profits and business assets. The owner also gets full control over the business and gets to decide every aspect when it comes to spending money and how to improve the business.
Examples of a sole proprietorship
There is no specific industry for sole proprietorships, meaning sole proprietors come from various industries. Some examples of sole proprietorships include:
- Freelance writers
- Web designers
- Virtual assistants
- IT consultants
- Etsy-store owners or online sellers
Any business that can be operated and owned by one person without formal incorporation, meaning it’s not registered with the state, is considered a sole proprietorship.
What qualifies your business as a sole proprietorship?
Businesses in various industries with a sole owner can qualify as a sole proprietorship. If you have a viable business idea or business plan that can be funded and operated by one person without the need to appoint shareholders or investors, it can qualify as a sole proprietorship.
With just one owner and a simple business structure, you don’t need to register your business with the State and the IRS.
Sole prop vs LLC
While a sole proprietorship is the simplest form of business ownership, it is still important to consider whether forming a limited liability company (LLC) might be more suitable for you and your business. An LLC offers personal liability protection to its owners, shielding their personal assets from business liabilities. In contrast, a sole proprietorship does not provide this separation, making the owner personally responsible for all business debts and obligations.
Who is it best for?
Sole proprietorships are ideal for startups, freelancers, and new entrepreneurs who are looking to start operating a business quickly without too many requirements and government regulations.
If you desire complete control over a business and business activity and operations, a sole proprietorship is an ideal choice for freelancers, startups, consultants, and small businesses that could be run by a single individual.
How to set up a sole proprietorship in North Carolina
Setting up a sole proprietorship in North Carolina involves several steps to ensure that your business is legally recognized and operates smoothly. Although you don’t need to formally register your business to the state department that handles business affairs in North Carolina and can start doing business immediately, here is a guide with optional and required steps to help you through the process:
Is there any formal paperwork filed to establish this type of business?
In North Carolina, there is no specific formal paperwork required to establish a sole proprietorship. It is not an entity that is registered with the state.
Name your business
Naming your business might not sound that important, but it is actually one of the most crucial steps when starting a business. By default, a sole proprietorship uses the owner’s legal name. But you have the option to operate under a different name by acquiring a DBA or “doing business as.” However, if you want to continue using your own name, that is also alright, depending on the nature of your business and how you want people to perceive your business.
Using your own name
Using your own name is the easiest way to start your sole proprietorship. However, some potential customers might not find it appealing. But if you already have a good customer base that is steadily growing, you might not have to change the business name at all and just work on improving your personal brand.
If you decide to use your own name and not get a DBA, you don’t need to do anything, and you can start conducting your business without a fictitious name or trade name. In the event that you want to name your business later on, you can always obtain a DBA anytime.
Setting up a DBA
On the chance that you do decide to name your business, you can go ahead and obtain a DBA from the Secretary of State in North Carolina. But before you do, you need to make sure that you choose a name that is unique, easy to remember, and relevant to your business. In addition, you also need to check if the name is available because businesses in North Carolina cannot have the same name or highly similar names.
To check for the availability of a name, you need to visit the North Carolina Secretary of State’s Website to search the business database using their business name search tool. Upon doing a quick search and confirming that the name you want is available, you can go ahead and file for the DBA.
To file for a DBA, you need to visit the County Register of Deeds. You can use this website to find the nearest one in your area. But before visiting, you can go ahead and fill out the assumed business name form to get a head start. Note that you will need to get the form notarized before submitting it to the register of deeds.
The DBA fee is $26, and the good thing about DBAs in North Carolina is that they do not expire, which means you wouldn’t have to renew every now and then.
Now that you have a DBA, you can either start operating your business or might need to obtain specific licenses depending on the type of business you are about to run.
Some businesses like liquor stores and professions like accounting firms need a business license or more to operate legally, and you can check this page from the North Carolina Secretary of State website to learn more about the licenses your business needs. Aside from state licenses, you can also get an employer identification number if you wish to hire employees.
North Carolina taxes
Unlike other business entities like LLCs, incorporations, corporations, and general partnerships, tax payments for your sole proprietorship are easy.
Instead of filing separate tax forms, the business’s income and expenses are reported on the owner’s personal tax return. The owner is required to report the business income on Schedule C of their individual tax return (Form 1040) and pay self-employment taxes, which include Social Security and Medicare taxes.
- Easy to set up
- The owner has complete control over the business
- Unlike an S corp, annual meetings with shareholders are not required
- The owner is entitled to all business profits
- You are personally liable for business debts, which could affect personal assets
- There are limited funding options because sole proprietorships do not attract lenders and venture capitalists
Can sole proprietorships in North Carolina open a business bank account?
Yes, sole proprietorships can open a business bank account in North Carolina. Separating your personal and business finances is advisable to maintain accurate records and simplify tax reporting.
How can sole proprietorships benefit from a business bank account?
A dedicated business bank account allows sole proprietors to track business income and expenses separately, making financial management more efficient. It also provides a professional image when dealing with clients and simplifies the process of filing taxes.
Is a sole proprietorship better than an LLC?
The choice depends on your business needs, and both options have their own sets of advantages and disadvantages.
Can you secure funding for a sole proprietorship startup in North Carolina?
Securing funding for a sole proprietorship startup can be challenging. Lenders and investors may view sole proprietorships as riskier ventures compared to established businesses or those with formal legal structures.
What does unlimited liability mean in a sole proprietorship?
Unlimited liability means that the owner of a sole proprietorship is personally responsible for all business debts and obligations.
Should a sole proprietor get an EIN?
An EIN is an employer identification number. It’s a nine-digit number issued by the IRS and is primarily used for tax purposes when you file income taxes. Sole proprietors aren’t required to get one, but it is required if you plan to open business bank accounts or hire employees.
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