Comprehensive Guide to Setting Up a Sole Proprietorship in the USA

A sole proprietorship is the easiest form of business to set up in the United States. As a matter of fact, about 70% of the businesses in the US are sole proprietorships. Apart from the ease of setting up, this business model gives the owner full control over their business decisions and revenue management.

On the basis of legal structures, sole proprietorship in the United States are divided into the following three categories:

• Independent contractor: A self-employed individual who provides services on the basis of a contract. They can choose their own clients but the process of working and methods are often decided by the client. 
• Business owner: Individuals with complete autonomy over the work and administration of the business. 
• Franchisee: Individuals operating a franchise of a larger brand, but with limited freedom. The franchiser owns all the trademarks, service symbols and has a business model in place. However, all operations are taken care of by the franchisee.

Anyone who owns an unincorporated business by themselves becomes a sole proprietor. As a sole proprietor, you are liable to all taxes, debts, and losses. 

Here are a few key points to note who can be a sole proprietor in the United States: 

• You have a one-person business. Your business can’t be classified as a sole proprietorship if it has more than one owner.
• You have a valid US work permit.
• You have valid federal and state licenses required for your business type.

Every business entity has its share of advantages. However, you must carefully choose which entity to build, as it is crucial in determining a number of legalities and tax procedures.

To understand why sole proprietorship is one of the most preferred business structures, consider the following benefits:

• As the sole owner, you assume full control over the business
• You can make business decisions without being influenced by anyone else
• Sole proprietors enjoy passed-through taxation, meaning you will be taxed on your business earnings and personal income
• Sole proprietor tax rates are the lowest compared to other business entities
• The cost of setting up a sole proprietorship in the US is very affordable

Setting up a sole proprietorship in the US is comparatively easier, but every owner must have the following documentation to proceed with registration: 

• Business Name: A valid business name registered with the state or county. You can operate in your own name as well. 
• Business License: File for a business license within the city or county to operate your business. There may be additional federal or state licenses depending on the nature of your business activity and location.
• Trade Permit or Professional License: This license is necessary for sole proprietors engaged in a regulated trade or profession, for example a trucking or delivery business. There are a number of licensing requirements and regulations for obtaining a professional licensing.

There could be additional requirements/criteria depending on the location of your business. There are specific licenses – both federal and state, depending on the business category recognised by the official agencies. 

For instance, some states require you to file a fictitious name. If your business name is different from your legal name, then you have to file for a DBA (Doing Business As). Also called a trading name, registering with a DBA is a public way to register your business name with state or local jurisdiction.

There are a few criterias 

• Sales and Use Tax Permit: This permit is necessary to sell goods and services in a state that imposes a sales tax. The sole proprietor must register with the taxing authority of the relevant state to obtain the permit and collect sales tax.
• Federal Employer ID Number: To hire and pay your employees, sole proprietors must have a Federal Employer Identification Number (FEIN). To obtain this number, apply with the Internal Revenue System via online or offline procedures.

Setting up a sole proprietorship in the United States is comparatively easier. Let us go over the steps to register a self-employed business in the US. 

Choose a business name: 

• You can decide to name the business after your own name, or choose a fictitious name, or a DBA. 
• Depending on the locality, you will have to register your business name or a DBA to the local jurisdiction. 

Obtain the necessary licenses: 

• Licenses and permits are required for certain business activities, in specific locations, at both state and federal levels.
• The federal government regulates businesses such as drugs or meat production, alcohol, tobacco and firearm products, or investment counseling. 

Register with local tax authority: 

• Register with the relevant local tax authority. 
• If the business activity involves selling taxable products or services, register with the state’s taxing authority. 

Apply for a bank account: 

• It is important to maintain bank records of your business so it is ideal to get a separate bank account for a sole proprietorship in the US.
• This ensures the safety of your transactions, without mixing them up with personal financial statements. 

Apply for EIN: 

• If you plan to hire employees in the future, you will need an Employer Tax ID Number from the Internal Revenue System. 
• Most banks require an EIN to open a bank account, so you will want to get it done.

It is relatively simpler to form a sole proprietorship in the US. However, with the changing local laws and regulations, the process can get complicated to decide where do you want to start. In that case, it is ideal to partner with a global employment solution with a local presence in the US. 

‍Multiplier has local entities in over 150+ nations and we know the detailed procedures of setting up local offices on an international level. We can help you onboard time and manage payrolls from across the world. Our skilled experts will ensure you are in the loop throughout the process and face no hassles. Get in touch with our experts to learn more!