How to Start a Sole Proprietorship in Ohio
If you’re considering launching a small business in Ohio, understanding the different types of business structures available is crucial. One such structure is a sole proprietorship, which is a popular choice for many entrepreneurs due to its simplicity and flexibility. In this guide, we will delve into the details of starting a sole proprietorship in Ohio, including what it entails, the necessary qualifications, the paperwork involved, tax obligations, and more.
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What is a sole proprietorship?
A sole proprietorship is a type of business structure where an individual operates and owns a business as a single entity. Unlike other structures, such as general partnerships or corporations, a sole proprietorship does not have a separate legal existence from its owner. This means that the owner assumes complete responsibility for the business’s liabilities, debts, and obligations.
Examples of a sole proprietorship
Numerous small businesses operate as sole proprietorships across various industries. Examples include freelance writers, consultants, photographers, artists, small retail shops, and home-based businesses. Sole proprietorships offer flexibility and simplicity, making them an attractive choice for many individuals starting their entrepreneurial journeys.
What qualifies your business as a sole proprietorship?
Qualifying your business as a sole proprietorship is relatively straightforward. As long as you are the sole owner of the business and there are no partners or shareholders involved, your business can be classified as a sole proprietorship. Many people are operating as a sole proprietor without knowing it, simply by conducting business activities under their legal name and for their own profit.
Sole proprietorship vs LLC
A sole proprietorship, often abbreviated as “sole prop,” is a type of unincorporated business structure where an individual operates as their own business entity. In a sole proprietorship, there is no legal separation between the business and its owner. This means that the owner assumes all responsibilities, liabilities, and debts of the business.
LLC stands for “Limited Liability Company.” An Ohio LLC is a legal business structure that combines elements of a corporation and a partnership or sole proprietorship. It provides personal liability protection to its owners, known as members. This means that the member’s personal assets are generally protected from being used to satisfy the company’s debts or legal obligations.
Who is it best for?
A sole proprietorship is best suited for individuals who:
- Have a simple business structure and operate as the sole owner.
- Do not anticipate significant liability risks or the need for extensive funding.
- Seek a straightforward and cost-effective business setup.
- Prefer maximum control over their business decisions.
Small businesses, startups, and freelancers are often the most likely to use the sole proprietorship structure, though it is available to anyone. If you are unsure of the best route for your own business, it can be useful to seek legal advice from an experienced business attorney.
How to set up a sole proprietorship in Ohio
You can establish a sole proprietorship the moment you do business under your own name. While this process is very straightforward, running a business of any type can come with additional responsibilities and optional ways to grow the venture. Some common steps that you may take are outlined below.
Is there any formal paperwork filed to establish this type of business?
Under Ohio law, you may need to file paperwork to complete the incorporation process or start other types of businesses, but this is not the case for a sole proprietorship. These businesses can exist without being registered at all.
Name your business
When it comes to the name of your LLC, a lack of name registration means you do not need to file a formal name with the state. However, you do have options when it comes to what your business goes by to the public.
Using your own name
As a sole proprietorship is considered a single entity with its owner, it makes sense that the two would share a name (and a Social Security Number). By default, every sole proprietorship uses the name of its legal owner, with no steps to make this true. If you don’t want a flashier name or are comfortable advertising with your personal name, there is no need to do anything else.
Setting up a DBA
For small business owners who do want to use another business name, Ohio allows for sole proprietorships to establish a DBA name (or “Doing business as”), also known as a trade name. To do this, you will need to make sure the name you choose isn’t already in use by another Ohio business using an online name search and then register with the Ohio Secretary of State. Ohio also allows for the use of fictitious names, which are used when the name cannot be registered and are less formal.
For both a trade name and a fictitious name, you will need to complete the appropriate form and submit it to the Secretary of State alongside a $39 filing fee.
How to Check if a Business Name is Taken
Ohio licenses
Any business that sells or leases taxable goods in Ohio must have a vendor’s license, also known as a seller’s permit. This allows the business to collect sales tax and registers them to make tax payments to the Ohio Department of Taxation. Applications can be completed online through the Ohio.gov Business Gateway or at a local county auditor’s office and have a fee of $25 per business location when you file the form.
There is no statewide license required for general business operations, though many professions and industries have their own requirements. This is especially true for professional services like accountants, attorneys, and engineers. The State of Ohio website lists these areas and what may be required.
In addition to the state-level licenses, each local government may also have its own requirements for things like permits and zoning clearance. Always check with the county auditor’s office where your business operates to be sure that you are in compliance.
Pros
- Minimal cost to establish and maintain a business
- Quick startup process and no formal paperwork
- Owners have complete control of the business and its profits
- Pass-through taxation makes filing business taxes faster and may offer a better tax rate
- Business expenses are deductible on personal income taxes
Cons
- Owners take on unlimited personal liability, putting their personal assets at risk
- It can be harder to find capital through investors or banks, and may even be difficult to open a business bank account
- All responsibility falls on one owner, who may lack expertise or resources
- Self-employment taxes can be costly
- Customers may perceive these businesses as less credible than others
FAQs
Can I have employees as a sole proprietor?
Yes, you can hire employees as a sole proprietor. Before you can bring on a new hire, you will need to fulfill certain payroll and tax obligations, including obtaining an Employer Identification Number (EIN) from the IRS and paying required Ohio state taxes. Ohio also requires employers to have workers’ compensation insurance in place.
Are there any ongoing compliance requirements for a sole proprietorship in Ohio?
Sole proprietorships have fewer ongoing compliance requirements compared to other business structures, which is one of their advantages. You should stay informed of changes in local or state regulations that may require you to maintain compliance, but there are none required, including no annual reports.
Can I convert my sole proprietorship into an LLC in the future?
Yes, it is possible to convert your sole proprietorship into an LLC at a later stage if you wish to benefit from the added liability protection and other advantages of an LLC structure. Consult with a legal professional or business advisor to understand the requirements and process for conversion.
Can my spouse and I both be the owners of an Ohio sole proprietorship?
In a sole proprietorship, there is a single owner who operates the business, and that owner can be an individual or a married couple. If both you and your spouse plan to own the business together, you can establish a joint sole proprietorship. This means that both of you will share the responsibilities, profits, and liabilities of the business.
Is a trade name the same as a fictitious name in Ohio?
No, a trade name is not the same as a fictitious name in Ohio. A trade name is a name used by a business to identify itself in commerce. A fictitious name is a name used by a business that is a different name from under which the business is legally organized.
Does a sole proprietor need a trade name?
If you’d like to operate a business under a name that’s different than your own name, you can file paperwork with the state to establish a business name or trade name. Doing so gives you the chance to operate under a different name but doesn’t offer any liability protection and doesn’t change the way you pay taxes.
How does a sole proprietorship pay taxes?
As a sole proprietor, your business income is treated as personal income, and you will report it on your personal tax return. This means that you are not required to file a separate tax return for your business but will use the Schedule C form to report income and expenses. Your net profit will then be taxed at your normal individual tax rate. It is critical to keep accurate records of your business profits and what you spend to ensure you are reporting it properly.
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