How to Start a Sole Proprietorship in Rhode Island
If you are looking to start a sole proprietorship in Rhode Island, this article is for you. Setting up a business can be a challenging process, but if you choose to become a sole proprietor, it’s easy to get started. Read on to learn how to get your small business up and running in Rhode Island.
What is a sole proprietorship?
A sole proprietorship is a type of business entity where an individual owns and operates the business. It is the simplest form of business structure that offers complete control to the owner without the need of getting investors, shareholders, or partners.
Although the business owner is entitled to all business profits, they also have unlimited liability for all business debts, which can affect personal and business assets. If, for example, your business gets into financial trouble, you may be required to use your personal funds to pay business debts.
Examples of a sole proprietorship
There are no specific industries for sole proprietorships, but this business entity is preferred by:
- Freelance copywriters
- Online sellers
- Local service providers
What qualifies your business as a sole proprietorship?
You must be the sole owner of a business to qualify as a sole proprietor and establish a sole proprietorship in Rhode Island. Being the sole owner means you have control over every aspect of your business, including the decision-making and every business activity.
Additionally, as a sole proprietor, you have the option to operate the business under your own name or conduct business using a trade name or DBA, which is straightforward and easy to obtain.
Sole prop vs LLC
While a sole proprietorship is the simplest and most common business structure, it does not provide personal liability protection. In contrast, forming a limited liability company (LLC) can offer personal asset protection by separating your personal assets from your business liabilities. However, forming an LLC involves more paperwork and administrative responsibilities compared to a sole proprietorship.
Who is it best for?
Sole proprietorships are well-suited for individuals who want to start a small startup with minimal complexity and prefer to have full control over their operations. This business structure is particularly suitable for solo entrepreneurs and freelancers who don’t anticipate significant risks or need personal legal protection.
How to set up a sole proprietorship in Rhode Island
If you understand what a sole proprietorship is and have decided that it is the ideal option for your business, this section of the article will guide you in establishing your very own sole proprietorship. From naming the business, the forms you need to do so, and obtaining the necessary licenses, you will learn everything you need to get your business off the ground.
Is there any formal paperwork filed to establish this type of business?
Unlike other business structures, such as LLCs, incorporations, and general partnerships, there are no business forms to start doing business as a sole proprietor in Rhode Island. However, you may need to obtain specific licenses and business permits to operate legally, depending on the nature of your business.
Name your business
When starting a sole proprietorship in Rhode Island, you have two options for naming your business. You can either use your own name, which is sort of the default option for sole proprietorships, or you can operate under a different name which requires you to obtain a DBA or fictitious business name certificate from the Secretary of State in Rhode Island.
Using your own name
When using your own name, you don’t need to file or pay for any DBA filing fees. Without filing any forms, your sole proprietorship uses your own name by default. For example, if your name is John Smith, your business name will also be named John Smith, which in most cases not having a business name is not very appealing to potential clients.
However, for freelancers and photographers trying to build a personal brand, using their name is the ideal choice. On the other hand, if you think your business will benefit more if you operate under a different name, you can go ahead and set up a DBA.
Setting up a DBA
To set up a DBA in Rhode Island, you must come up with an appropriate name for your business. The business name should be relevant to your business and should best describe what your business offers. For example, if you are a barber, you should choose a business name that tells people what you do, as it can help promote your business and get more potential clients.
If you already came up with a relevant business name for your sole proprietorship, you will need to check the name availability because all business names in Rhode Island should be unique. Fortunately, you can find out the name availability with a simple search using this search tool here.
If the name is available, you can visit the nearest county clerk’s office in your area. You can use this guide to check the nearest offices. But before visiting, you can fill out the DBA form to save some time. Alternatively, you can also file for a DBA online using the Rhode Island SOS Portal.
The filing fee is $10, with an additional $5 notarization fee, which is pretty affordable compared to other states.
Research state licenses
Although sole proprietorships don’t need to register with the IRS and secretary of state, some businesses like liquor stores and barbershops are required to obtain the necessary licenses to operate legally. If you are not sure what licenses you need, you can visit the Department of Business Regulation website to learn more and file for the said business licenses.
Rhode Island taxes
Since there is no legal distinction between you as an owner and you as an individual taxpayer, paying income taxes is fairly easy.
As the owner, you’ll report business income and expenses on your personal tax return and pay the tax rate associated with your income.
To compute your taxes, you will need to use a Schedule C Form 1040 when filing federal taxes with the IRS and complete corresponding state tax forms in Rhode Island.
Additionally, as the small business owner, you are also responsible for paying self-employment tax payments, which include both employer and employee portions of Social Security and Medicare taxes.
- The most inexpensive business structure to set up
- The sole owner has full control over the business
- Annual meetings and reports are not required
- Tax reporting is simplified as you can file your taxes using your social security number
- You have the freedom to change and dissolve the business without complicated procedures
- The owner has unlimited personal liability, which puts your assets at risk in an unincorporated business
- Limited opportunities to raise funds in the short term
- Decision-making can be stressful for new business owners
Can sole proprietorships in Rhode Island hire employees?
Yes, sole proprietorships in Rhode Island can hire employees. However, you will need to comply with state and federal employment laws and obtain an employer identification number and other documentation.
What is the most challenging part of running a sole proprietorship in Rhode Island?
One of the most challenging aspects of running a sole proprietorship in Rhode Island is the lack of personal liability protection. As the sole owner, you are personally responsible for all business debts and liabilities, which can put your personal assets at risk.
Can sole proprietorships get liability protection in Rhode Island?
No, sole proprietorships do not provide personal liability protection. If you want personal liability protection, you may consider forming an LLC or another business entity that offers limited liability.
Can sole proprietorships in Rhode Island open a business bank account?
Yes, sole proprietorships can open a business bank account. It’s advisable to keep your personal and business finances separate to maintain accurate records and simplify tax reporting.
How much does it cost to set up a sole proprietorship in Rhode Island?
The cost of setting up a sole proprietorship in Rhode Island is relatively low. There are no formal registration fees for the business itself, but you may incur costs for obtaining necessary licenses or permits depending on your industry.
How do you know if you need a business license?
Some businesses are required to get specific licenses. For example, some professions, like barbering and accounting, need a specific license to offer their services. If you own a small grocery store, you will need to obtain a license to sell liquor and tobacco. Check the Department of Business Regulation website to research license requirements.
Can you convert your sole proprietorship into a different business structure?
Yes. Many bigger businesses and corporations started as sole proprietorships, which makes it an excellent choice if you want to start your own business with expansion in mind, as you can always get incorporated when the time comes.
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