How to Start a Sole Proprietorship in Pennsylvania
Known for its simplicity, sole proprietorships allow budding entrepreneurs to start a business quickly. It gives owners complete control of their own businesses and very few regulatory requirements, making it a great option for many entrepreneurs in Pennsylvania.
What is a sole proprietorship?
A sole proprietorship is a business structure available to small businesses in Pennsylvania in which a business is operated and owned by a single person and not treated as a separate legal entity. This is intended to be a straightforward structure that allows maximum flexibility and control for the owner, making it a great choice for new businesses and professional service providers.
Examples of a sole proprietorship
Sole proprietorships can take various forms and operate in different industries. For example, a freelance photographer, a neighborhood bakery, or a sign-printing business can all be examples of sole proprietorships. The flexibility of this business structure allows individuals to become entrepreneurs in whatever manner they choose.
What qualifies your business as a sole proprietorship?
There are only two primary criteria that will qualify a business as a sole proprietorship. The first is that the business must have a single owner, who has total control over all aspects of the business and is the only person named on any paperwork. In some cases, a business could be considered a joint venture between spouses and qualify, but this is rarer. The second criteria is that the owner must hold unlimited liability for the business debts and obligations.
Sole proprietorship vs LLC
A sole proprietorship is a simple and unincorporated business structure that treats a business and its owner as a single legal entity. This allows for maximum autonomy and provides tax advantages to simplify business ownership.
An LLC, or Limited Liability Company, is an alternative business structure that is commonly used by small business owners. In an LLC, the business is a separate legal entity from its owner or owners, which affords them limited liability protection while still allowing for pass-through taxation.
Who is it best for?
A sole proprietorship is best suited for individuals who are starting a small business or operating independently. It is an ideal choice for entrepreneurs who value simplicity and wish to have complete control over their business operations. Sole proprietorships are commonly chosen by freelancers, consultants, and small businesses with a limited number of employees.
How to set up a sole proprietorship in Pennsylvania
With a basic understanding of how a sole proprietorship works, you can choose to move forward with this business structure for your Pennsylvania venture. While you do not need to worry about formation paperwork, there may be other processes and regulations to consider – the below are some of the most common.
Is there any formal paperwork filed to establish this type of business?
Some types of businesses, like an LLC or corporation, do need to register with the state. However, if you choose to form a sole proprietorship, you don’t need to file any official paperwork.
Name your business
In other business structures, like an S Corp or an LLC, you will name your business during the filing process. Since this does not apply to a sole proprietorship, you will need to decide what approach you take to naming the business: using your own name or choosing a “doing business as” business name.
Using your own name
Sole proprietors and their business are considered a single legal entity, which means they share the same legal name and Social Security Number. You don’t need to take any steps for this to be true – as soon as you are operating a business in your name, you are using the default form of naming for a sole proprietorship. This is often the best choice for someone who needs to launch a business quickly or will always be working alone, especially in the professional services industry.
Setting up a DBA
If you want to use a name other than your own name, you can do this by filing a DBA or fictitious business name through the Pennsylvania Department of State. Once you choose a name that is not being used in the state and meets general requirements, you can complete the Fictitious Business Name Registration Form and pay the $70 filing fee. Upon approval, you will be able to use the new name for your business.
While there is no general business license in Pennsylvania, there is a state-level requirement for businesses to obtain a seller’s permit. This permit allows for a business to collect sales tax on any taxable goods and services and can be obtained at no cost through the Department of Revenue.
Other requirements will vary based on a number of factors. Some industries and professions will require special licensing through the state, like accountants, funeral directors, and realtors. Local governments also have jurisdiction over these requirements and may have special permits or zoning clearances that your business needs. You should contact the county clerk’s office where your business is run to be sure that you are meeting all relevant requirements.
As a sole proprietor, you have the option to hire employees to assist in running your business. When hiring employees, you must comply with federal and state employment laws, including obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). You will also need to complete federal and state tax withholdings and meet other requirements, like providing workers’ compensation insurance.
- Simple, fast, and inexpensive formation process with little upkeep
- Owners maintain complete control of their business
- All business profits go to the owner of the sole proprietorship
- Qualification as a pass-through entity, which allows for simple and advantageous tax filing
- Lower costs for maintenance and regulatory requirements
- No need to publicly disclose finances
- Owners take on unlimited personal liability, putting them at risk of losing personal assets
- Difficulty getting access to loans, credit, and business bank accounts
- A single owner may make it difficult to accumulate business assets or capital, especially without certain expertise
- The business dissolves if something happens to the owner
What do sole proprietors have to do for annual reports in Pennsylvania?
Pennsylvania does not require any annual reporting for sole proprietorships, like they may for other business structures. This means that financial disclosures are not required and there is no recurring payment necessary.
Can I have a partner as a sole proprietor?
No, by definition a sole proprietorship has a single owner. A general partnership operates similarly, but can have multiple owners. Some joint ventures between spouses can qualify as a sole proprietorship, but they would be considered a single owner, not a partnership.
Can I deduct business expenses on my personal income taxes as a sole proprietor?
Yes, as a sole proprietor you will file a single tax return, including both personal and business expenses. Ordinary and necessary expenses related to business activity can be used as deductions to reduce your overall taxable income each year.
What liability protections can I get as a sole proprietorship?
A sole proprietorship does not provide personal liability protection. This means that your personal assets are at risk if the business incurs debts or legal liabilities. You may be able to purchase business insurance to help with some potential costs, especially for professional service providers.
Do I need a separate business bank account for my sole proprietorship?
While it is not a legal requirement, it is highly recommended to have a separate bank account for your business. It helps maintain clear financial records and simplifies tax reporting. Some banks will require you to have an EIN to open these accounts.
Does a sole proprietor need business licenses?
You may need to obtain specific licenses or permits to operate legally in Pennsylvania, which may require paperwork and filing fees. You can visit the state website to research possible licenses.
How does a sole proprietorship pay business taxes?
As a sole proprietor, you and your business are considered the same entity for tax purposes. This means that the business’s income, expenses, and tax liabilities are reported on your personal tax return using Schedule C. The profits or losses from the business are then taxed at your individual tax rates.
Are there certain tax considerations to weigh as a sole proprietor?
It is important to maintain accurate records of your business’s income and expenses to ensure proper reporting and compliance with tax laws and to claim all the deductions you are owed.
You may also need to account for self-employment taxes when completing your income tax return. These tax payments cover both the employer and the employee portion of your Medicare and Social Security contributions and usually start at about 15% of your claimed net income.
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