How to Start a Sole Proprietorship in Washington
If you are looking for a new and exciting way to make extra cash on the side in Washington, you can open a small business. Creating a startup or sole proprietorship is the simplest and most inexpensive way to start a business in Washington and in any other state, and this article will show you how.
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What is a sole proprietorship?
A sole proprietorship is a business entity owned and operated by a single individual. It is the simplest form of business ownership, where the owner of a sole proprietorship or sole proprietor assumes complete control and responsibility for all aspects of the business.
The owner retains all the profits but is also personally liable for any debts or legal obligations of the business. Sole proprietorships are commonly chosen by freelancers, consultants, independent contractors, and small businesses operated by a single person.
Examples of a sole proprietorship
Sole proprietorships are found in various industries. A few examples include freelancers, such as web designers, writers, coders, and other individuals that offer content creation to clients. Small bakeries and retailers that serve directly to customers, self-employed photographers, and contractors can also be considered sole proprietors.
What qualifies your business as a sole proprietorship?
If you are the sole owner of a business that operates independently and assumes all risks, profits, and losses of the business, then you are qualified as a sole proprietor. Any business that requires minimal capital and is possible to be run and operated by one person can qualify for a sole proprietorship in any state, including Washington.
Sole prop vs LLC
While a sole proprietorship is the simplest and most common form of business ownership, it is important to understand the differences between a sole proprietorship and a limited liability company (LLC). A sole proprietorship does not offer legal protections, unlike LLCs, which offer limited liability protection for the owner’s personal assets and money.
Who is it best for?
A sole proprietorship is best suited for individuals who want to start a small business and maintain full control and flexibility. It is commonly chosen by freelancers, self-employed individuals, and those operating small, low-risk businesses. If you are comfortable assuming personal liability for your business and value simplicity and ease of operation, a sole proprietorship may be the right choice for you.
Although there may be risks in sole proprietorships, remember that the cost of starting one doesn’t cost that much, and if you are up for the task and confident with your skills as a sole proprietor, it is a good way to start something challenging and rewarding.
How to set up a sole proprietorship in Washington
If you want to start a sole proprietorship, all you need is a solid business idea and business plan to start. Once you have gained funding for your sole proprietorship, it is time to get to the next step, which is naming your business and getting all the required permits to operate legally.
Is there any formal paperwork filed to establish this type of business?
Unlike some other business entities, such as LLCs, general partnerships, and corporations, there is no formal paperwork required to establish a sole proprietorship in Washington.
Name your business
For most people, naming the business is the most exciting part. You don’t need to name a sole proprietorship if you don’t want to because you can use your own legal name by default. However, you also have the option to choose a different name by acquiring a DBA.
Using your own name
If you decide to use your own name, you don’t need to get a DBA. Since all taxation requirements and transactions will be under your social security number and personal bank account, you don’t need to obtain a DBA.
Setting up a DBA
To set up a DBA, you pick a business name. However, you can’t use any name you want. You have to make sure the name you want is available using the Washington State Department of Revenue database here.
If the name is available, you, as the business owner, can file for a DBA online here or complete this application form and submit it in person. It costs $24 to file, and they do not require renewal.
This guide will help you find the closest office to file if you wish to visit in person.
How to Check if a Business Name is Taken
Obtain state licenses
Some sole proprietorships don’t need any licenses to operate. However, depending on the nature of your business, you might need a specific business license or permit to operate legally. For example, if you intend to sell liquor or tobacco, you will need a specific business permit for both. To learn more and obtain the licenses you need, you can visit the Department of Revenue website.
Washington taxes
From a tax perspective, a sole proprietorship is considered a pass-through entity. This means that the business itself does not pay separate taxes. Instead, the owner includes the business income (business profits) and expenses on their personal tax return (Form 1040) using Schedule C. The net profit from the business is subject to self-employment tax, which covers Social Security and Medicare contributions. It is important to maintain accurate records of your business income and expenses to ensure proper tax payments are made.
Because there is no legal distinction between you and your business, you are considered as one legal entity, meaning all business taxes are paid through your personal tax returns. You’ll be responsible for paying self-employment tax, too, using your social security number.
Pros
- It is very easy to set up and establish with minimal paperwork and government regulations
- The owner has complete control over the decision-making with no need to consult with other owners and shareholders
- Business taxes are simple with sole proprietorships because it is reported on your personal income tax return
- All profits belong to the sole owner of the business
- There are fewer regulatory requirements compared to other business entities
Cons
- Unlimited personal liability over business obligations and debts
- The limited ability to raise capital because investors with rather spend money on incorporation or LLC
- It is quite challenging to be responsible for all business activity and operations
FAQs
What does unlimited liability in a sole proprietorship mean?
Unlimited liability means that the owner of a sole proprietorship is personally responsible for all business debt and legal obligations. If the business faces financial or legal difficulties, the owner’s personal assets are at risk because they can legally be used to satisfy those obligations.
Are you required to obtain a DBA for your sole proprietorship in Washington?
It is advisable to check the specific requirements of the state of Vermont regarding DBA registrations. While the general rule is that a DBA registration is required when operating a sole proprietorship under a name other than the owner’s legal name, the specific regulations may vary from state to state.
Can sole proprietorships in Vermont open a business bank account?
Yes, sole proprietorships in Vermont can open a business bank account. It is advisable to have a separate bank account for your business transactions to keep your personal and business finances separate. This separation can help with financial record-keeping and simplifies tax reporting.
What are the advantages of opening a business bank account?
Opening a new business bank account for your sole proprietorship can have many benefits, such as the separation of personal and business finances and simplifying bookkeeping and tax reporting. It can also add an extra layer of professionalism and credibility to financial transactions with suppliers and customers, and it makes monitoring your income, expenses, and cash flow easier.
What is an employer identification number (EIN), and how can it help sole proprietorships?
An Employer Identification Number (EIN) is a unique nine-digit number, sort of like a social security number, issued by the Internal Revenue Service (IRS) to identify businesses for tax purposes. While sole proprietors are not required to have an EIN unless they have employees or choose to form a partnership or corporation, obtaining an EIN can still be beneficial. It allows you to separate your business and personal finances, facilitates opening a business bank account, and may be required for certain permits or licenses.
Can you incorporate a sole proprietorship?
No, a sole proprietorship cannot be incorporated. Unlike other business entities like corporations or LLCs, a sole proprietorship is not a separate legal entity. The business and the owner are considered one and the same. However, you can choose to convert your sole proprietorship into another business structure, such as an LLC or corporation, if you wish to obtain limited liability protection or accommodate future growth and expansion.
Does a sole proprietor need a business license?
However, depending on your business activities, you may need to obtain specific licenses or permits at the state and local levels. These requirements vary based on the nature of your business, so it is essential to research and comply with the necessary regulations.
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