How to Start a Sole Proprietorship in North Dakota
Starting a sole proprietorship is an exciting time for entrepreneurs looking to take the next steps. As the simplest and most common form of business ownership, a sole proprietorship offers numerous benefits, such as complete control over decision-making and a straightforward setup process.
What is a sole proprietorship?
A sole proprietorship is the most common kind of business structure used in both the United States and North Dakota. In these businesses, the owner and the business are a single legal entity, meaning there is little needed to start a business. Owners and the business share everything from a name and Social Security Number to their tax payments each year. This also means that the sole proprietor takes on unlimited personal liability for any debts and obligations of the business.
Examples of a sole proprietorship
Nearly any business can be a sole proprietorship, but some common examples are:
- Freelancers: Independent contractors offering services such as writing, graphic design, web development, consulting, and photography.
- Retailers: Small-scale shops or online stores selling products directly to customers, such as clothing boutiques, gift shops, or specialty stores.
- Professional Services: Professionals providing services directly to clients, such as lawyers, accountants, architects, or therapists.
- Home-based Businesses: Businesses operated from home, including daycare services, tutoring, personal training, or online businesses like e-commerce or blogging.
- Tradespeople: Skilled individuals offering trade services like plumbing, electrical work, carpentry, landscaping, or home repair.
- Artisans: Artists and crafters selling handmade products, such as jewelry, ceramics, artwork, or handmade clothing.
What qualifies your business as a sole proprietorship?
Any business that is run by an individual and is not formed as another structure (like an LLC, S corp, etc.) is considered a sole proprietorship. When the owner operates the business on their own and assumes full personal liability, a business is a sole proprietorship.
Sole proprietorship vs LLC
A sole proprietorship is an unincorporated business structure that operates as a single legal entity with its owner. The two are treated the same for legal and tax purposes, which makes formation and taxation simpler. The owner has full liability for the business, which may put their personal assets at risk.
An LLC (Limited Liability Company) is a business structure in which the business is formed as a separate legal entity from its owner or owners (called members). These businesses offer pass-through taxation and other benefits of a small business but have limited liability protection to protect members.
Who is it best for?
A sole proprietorship is often the first step in any business for a startup or an independent venture, but it can be used by many business owners. Anyone who needs to start their business quickly or without much cost may choose this structure for its ease. It is also commonly chosen by those who intend to operate as a freelancer for a long period of time.
Those who want complete control of their business also gravitate toward a sole proprietorship because of the flexibility and autonomy offered.
How to set up a sole proprietorship in North Dakota
The second you conduct business activity under your own name, you are operating a sole proprietorship. While the formation doesn’t require more steps, running a business in North Dakota does have some considerations that could be important for your business. Some of the most common steps that North Dakota entrepreneurs take are listed below.
Is there any formal paperwork filed to establish this type of business?
One reason that small business owners choose a sole proprietorship is the ease of formation: there is no formal paperwork required. Unlike other structures that require paperwork or the long process of incorporation, sole proprietorships do not need to register with the North Dakota Secretary of State. These businesses are considered formed as long as they are operating.
Name your business
Depending on your type of business, you may choose to use a formal business name, which is allowed for sole proprietorships. But this may or may not be necessary for you, so you will choose the right path for your business.
Using your own name
The default name for any sole proprietorship is the legal name of the owner – if your name is Jack Taylor, then any sole proprietorship you run is also called Jack Taylor. This is often a good choice for professional service providers who will be selling themselves as the service or businesses that need to get off the ground quickly.
Setting up a DBA
If your own name is not the right fit for your business, North Dakota allows each sole proprietorship to operate under a trade name or Doing Business As, which is often called a fictitious name. This name must be registered, which means it needs to follow state requirements like being unique from other businesses and not being misleading. Once you choose this name, you will register the fictitious name through the Secretary of State so that it is on file.
North Dakota licenses
Each business will have some unique requirements when it comes to licensing; for example, certain professions and industries require licensure through the state. Any business that sells alcohol, tobacco, or firearms must apply for special licensing, along with many others.
There is no general business license in North Dakota that applies across the board. However, any business that sells or leases taxable goods and services will need to obtain a seller’s permit. This is a sales tax permit that allows your business to collect North Dakota sales tax and pay it to the Department of Revenue as needed.
In addition to state-level rules, each local government can also require its own permits and zoning clearances. Be sure to check with the county clerk’s office where your business operates to identify any licensure you need in place.
- The setup process is simple, fast, and inexpensive compared to other structures
- No ongoing annual reports or other requirements are necessary
- Owners have complete control of the business activity and direction
- Pass-through taxation makes the process simple and usually involves a lower tax rate
- Owners take on unlimited personal liability for all business debts, obligations, and lawsuits
- The responsibility of being the sole owner of a business can be stressful
- If the owner lacks expertise, it can limit the business’s growth
- Not all banks will allow a sole proprietorship to open a dedicated business bank account
- It can be difficult to obtain investors or credit to grow business assets
How do I obtain 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. You can use your Social Security Number for tax purposes. If you do need an EIN, you can apply through the Internal Revenue Service (IRS) website.
Do I need to collect sales tax for my sole proprietorship in North Dakota?
If your business sells tangible goods or certain services subject to sales tax, you will need to register for a sales tax permit with the North Dakota Tax Commissioner’s Office.
How can I finance my sole proprietorship in North Dakota?
Sole proprietors can finance their businesses through personal savings, loans from family and friends, small business loans, or personal credit. It may be more difficult to find investors than other business structures.
Where can I find resources and support for starting a sole proprietorship in North Dakota?
The North Dakota Small Business Development Center (ND SBDC) and the North Dakota Secretary of State’s Office provide valuable resources, guidance, and assistance for starting and running a sole proprietorship in the state.
What are the implications of personal liability in a sole proprietorship?
As a sole proprietor, you are personally liable for any business debts or legal obligations. This means your personal assets could be at risk if the business faces financial difficulties or legal claims.
How does a sole proprietorship pay taxes?
As a sole proprietor, your business income is treated as your personal income for tax purposes. This means that you report your business profits and losses on your individual tax return using a Schedule C form. Unlike other business entities, there is no separate tax return required for the business itself.
Does a sole proprietor pay other taxes?
Another important aspect of sole proprietorship taxation is the self-employment tax. Since there is no employer withholding taxes for a sole proprietor, you are responsible for paying self-employment taxes, which include Social Security and Medicare taxes. These taxes are calculated based on your net business income.
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