Got a business idea? If you have a passion, skill, or talent that you want to parlay into a Minnesota business, a sole proprietorship could be the option for you. If you can create products, have a knack for selling them, or have passion and skill that you can sell as services, why not make it official and start making income?
Many people think that starting a business is hard and would rather work full-time. With a sole proprietorship, you can do both. You can make money on the side and still work full-time. If your business grows into a self-sustaining way to make a living, you might not even have to work at all.
This article will guide you through the steps of starting a sole proprietorship, so if you are thinking about creating a business, you are in the right place.
What is a sole proprietorship?
The simplest and most common business entity used to start a business in the United States is called a sole proprietorship. These businesses are formed when a single owner creates an unincorporated business and runs that business as an individual.
In a sole proprietorship, there is no legal entity created, so there’s no difference between the owner and the business. This means the owner is entitled to all profits raised through the business and files them as part of their personal income taxes. However, this also means that any debts and losses are attributed to the individual, as well as them being implicated in any lawsuits brought against the business.
Who is a sole proprietorship best for?
If you are planning to start a business along with a partner or multiple partners, a sole proprietorship is not an option. The structure will be a good fit only if you plan to operate your business entirely independently, or with employees who report to you as the owner.
Many people choose a sole proprietorship if they need to quickly start their business or want to avoid filing fees and paperwork. In fact, if you are running the business in your own name, there is no paperwork to fill out at all to register your business. This allows the business to get up and running quickly with no friction.
A sole proprietorship comes with personal liability and it may be more difficult to secure a line of credit or investments.
How to set up a sole proprietorship in Minnesota
1. Choose your business name
Minnesota law allows you to operate a sole proprietorship under a name other than your own. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Minnesota Department of State’s website to see if the name you chose is taken or if something similar exists.
In Minnesota, a business name must not:
- Match any other business name in the state
- Be misleading
- Use any certain government agency terms or abbreviations like FBI or EPA
2. File a trade name
If you want to start a business under a name other than your own legal name, you need to file a trade name or an assumed name. The filing fee costs $30 or $50 to expedite the service, and it will enable you to do business under an assumed name even if you file taxes under your personal information.
With an assumed name, you can open a business bank account and make your business more trustworthy in the eyes of potential clients. Many people trust business names rather than using your legal name, and it could be better for generating income from sales.
You will have the rights to your assumed name, and no other business in the state can use it. However, you also need to think of a unique assumed name, and you can’t choose one that has already been registered before.
Having one gives customers peace of mind and gives your sole proprietorship an extra layer of legitimacy. You can fill out this online form to file for one and get the certificate in less than a month. Note that you need to renew the assumed name annually, unlike most states where a trade name or DBA is good for 5 to 10 years.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your startup, you may need to obtain a variety of business licenses or permits. This is managed by the Minnesota Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
You should also explore local regulations like building permits and zoning clearances where appropriate.
There are no general state business licenses in Minnesota, and other than your assumed name, you don’t need to obtain a state business license. However, you still need to obtain specific permits and licenses that apply to the nature of your business.
For example, you need to obtain building island zoning permits if you want to operate in a non-business zone like your home. As for an occupational license, you will also need to get one from your local county if you are a professional selling your services. The state website will have all the information you need regarding licensing, and you can also register online for a hassle-free experience.
You will also need to obtain Minnesota Tax Permit for selling taxable products and services. This permit will allow you to collect and remit taxes for the products and services you sell.
4. Obtain an Employer Identification Number (EIN)
If you’re planning a new hire, you need to obtain an EIN. This nine-digit number is issued by the IRS and used for tax purposes when you need to report wages. You can file for an EIN online through the IRS website.
If you do not have employees, you can use your Social Security Number to file taxes and are not required to have an EIN. However, some banks will require new business owners to have an EIN to open a business bank account, so you may want one anyway.
Once you have these pieces in place, your own business is ready to operate! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
An LLC, or limited liability company, is another common structure used for small businesses in the United States. While an LLC can have a single owner, it can also be owned by multiple people working together. The key differentiator for an LLC is that it offers protection of the owner’s personal assets. As a separate legal entity, an LLC is liable for debts and legal obligations, but the owner cannot be personally liable for these items. If the business fails, the owner could file for a business bankruptcy without owing business creditors their own money.
If you’re wondering about the difference between freelancing and setting up a sole prop, you’d set up a sole prop if you plan to hire other writers to work with you. A freelancer, or independent contractor, can’t hire people, but a sole prop can.
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What are the advantages of a sole proprietorship?
Simplified tax preparation
For the owner of a sole proprietorship, tax preparation is not much more complicated than it is for any other private citizen. In preparing personal taxes, the owner will include all profits and losses related to the business, which is calculated as a part of their income or expenses. This also means the tax rate stays at their individual rate as opposed to higher business and corporate tax rates.
Less paperwork and fees
To register most types of business, the state requires you to file your business name for inclusion in their directory and pay a fee. The sole proprietorship does not have to do this. There will be some paperwork and fees involved if you require licenses or permits, or you plan to operate under a fictitious name.
The sole proprietor of a business is responsible for everything, both good and bad. While liability is placed on that owner, they also enjoy complete control of their business. Any business decisions will be solely their responsibility, without worrying about pleasing shareholders or disagreements with a partner.
What are the cons of a sole proprietorship?
No asset separation
In a sole proprietorship, there is no legal separation between the assets of an owner and the business. While this makes things like taxes simple, it also means there is no delineation between the liabilities of an owner and their business. This means that if the business is not successful, the business’s debts fall to the sole proprietor, and if they cannot pay, it is their personal assets that will be seized. In the case of a lawsuit where money is owed, the same is true.
Single point of failure
When only one person is responsible for an entire business, it means that they are the single point of failure. If a sole proprietor passes away, becomes incapacitated, or is incarcerated, the business is usually not able to survive. While a corporation can be taken over as a legally separate entity, a sole proprietorship must be run by the owner.
Less availability of funding
With this business structure, finding startup funds could be tough. Many banks and investors do not like to offer funds to sole proprietors, as they cannot gain shares of the company or be sure that business debts will be repaid. Many government grants and business loans also exclude sole proprietorship.
How are sole proprietors taxed in Minnesota?
With this form of business, taxes are a part of the personal tax return of each owner. Business profit is calculated and reported on a Schedule C form which is for Profit or Loss from Small Business.
A Schedule C will calculate the income of the business, including all income and expenses, along with the costs of goods sold and costs for home-based businesses. The rest of the calculation is the net income, which is the amount of taxable business income.
This net income is entered on the Schedule C and included with other income and losses the owner (and their spouse) report on their income tax return.
The small business owner then pays taxes on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
There are several tax-related factors in Minnesota, such as payroll, capital gains, rates, impacts, and more. Just like in most states, sole proprietors in Minnesota need to pay a 15.3% tax rate for their SSN and Medicare. And you need to file it before the 15th of April every year.
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor must pay Social Security and Medicare taxes. If the business operates at a loss, tax payments are not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and business taxes that are applicable.
Taxable income for sole proprietorships in Minnesota varies. Some businesses are taxed on sales, use tax, and property tax. But you can learn all about your taxable income by visiting the Minnesota Department of Revenue website.
There are no minimum capital investment requirements in starting a sole proprietorship in Minnesota, or in any other state for that matter. As a sole proprietor, you have a complete ownership stake and you get to keep the profits or income your business generates. The capital you need depends on the nature of your business and the production of products or services you sell.
Sole proprietorships in Minnesota do not need to register with the state, meaning you don’t need to pay a registration fee. However, you will need to file for an assumed name or trade name, which costs $30. You also might need to get the licenses and permits which would have different fees. It is safe to say that you would need at least $100 to $200 for extra fees.
Yes, any sole proprietor that requires employees can hire one. However, you will need to obtain an Employer Identification Number or EIN from the IRS to legally hire someone to work for you. If not, you can also hire freelancers if you don’t need permanent employees to help you with the operations.
Yes, because filing for an assumed name or DBA in the state is required, you can open a separate bank account with the name of your business instead of using your personal bank account. This enables you to segregate the funds, which is essential for growing your business.