One of the first decisions you will make as a business owner is how to structure your business. Each option includes a number of advantages, disadvantages, tax implications, and regulations you must follow.
The most straightforward form of business in Utah is a sole proprietorship, which can be done quickly and with little to not cost. However, there are considerations when forming a sole proprietorship, including the amount of liability you may take on as the owner. Before choosing this business structure, read this guide to Utah sole proprietorships.
What is a sole proprietorship?
A sole proprietorship is a business entity that refers to an unincorporated business with a single owner. This is the simplest possible structure to set up a business. While there can only be one owner, a sole proprietorship can have employees and obtain an Employer Identification Number (EIN).
As a sole proprietor, your business profits are taxed as a part of your personal income. This makes the process simple, but can also expose you to personal liability in some cases.
Who is a sole proprietorship best for?
A sole proprietorship makes sense if you:
- Plan to start a business where only you are in charge and intend for that to be the case going forward.
- Want to call your business something other than your legal name.
- Plan to hire employees
- Want to set up a business quickly
How to set up a sole proprietorship in Utah
1. Choose your business name
Utah law allows you to operate a sole proprietorship under a name other than your own name. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Utah Division of Corporations and Commercial Code to see if the name you chose is taken or if something similar exists.
In Utah, 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 an assumed business name
Utah requires all business names, including those that are the same as an owner’s legal name, through the Department of Commerce.
If you choose to operate the sole proprietorship under a name other than your own legal name, you can register the assumed business name or Doing Business As name with the Utah Division of Corporations and Commercial Code. (Some states call it a fictitious name or a trade name, but Utah uses an assumed name).
To do so, you will fill out a Doing Business As application. If you would like to file online, you can apply and register through the Utah One Stop Business Registration. There is an associated filing fee in both cases of $22.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your business, you may need to obtain a variety of business licenses or permits. This is managed by the Utah 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.
In Utah, a general business license is not required, but a state-level seller’s permit must be issued. This permit serves as the state’s sales tax registration and must be obtained by any business in Utah that intends to sell or lease tangible personal property or certain services. The Utah Taxpayer Access Point can be used to apply for this seller’s permit. Utah may also require certain licenses and permits for specific professions and industries, which are issued through the Division of Occupational and Professional Licensing.
Local governments in Utah may also require licenses and permits depending on your business activity and local rules. For example, Salt Lake City requires every business to have a general business license in order to operate there. Be sure to check with any city or county governments where you plan to do business to ensure you have all the proper credentials.
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 small 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, you officially have your own business! 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?
A Utah LLC is a limited liability company that can be formed by one or multiple people. The primary difference in an LLC is that it is a separate legal entity from the owner. In other words, your business and your personal assets are separate. With an LLC, taxes are filed separately and the business’ liability does not translate to the owner.
Setting up a sole proprietorship is simpler than setting up an LLC because it does not have the same business tax implications.
If you’re freelancing, you might wonder if you need to set up a sole prop. If you plan to hire freelancers, then yes. To hire others, you need a business structure like a sole proprietorship.
If you don’t plan to hire anyone, you can continue to freelance and pay taxes on the income without setting up a sole prop.
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What are the advantages of a sole proprietorship in Utah?
Simple way to start a business
Utah sole proprietorships are incredibly easy to set up and do not require any filing process or fees at the outset. In fact, if you have done any freelance work or made money through a side hustle, you are technically operating a sole proprietorship. The simple and inexpensive start means you can quickly legitimize any business you are doing by opening a bank account and distributing formal marketing materials.
Your business remains yours
As the owner of a sole proprietorship, you have complete control of your business. Decisions will not need to take into account legal partners, shareholders, or partners, giving you the freedom to change your course or adjust as you learn about your business.
Easy transition to a corporation
Starting a business as a sole proprietor does not mean you will have to operate that way through the life of your business. At any time, you can convert a business to an LLC, corporation, or general partnership with the right paperwork and process. This allows you to feel out your business and settle on a model before you move to a corporate structure.
What are the cons of a sole proprietorship?
No personal asset protection
In a sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. If the business has a financial obligation that can’t be met, your personal money and property can be used to meet that obligation.
Less access to funding
A sole proprietorship may not be given the same access to business accounts and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for sole proprietorships. You may also experience problems raising capital in the beginning since a sole proprietorship doesn’t carry the same credibility as an LLC or corporation.
Harder to sell your business
If your business grows to a place where you are profitable and have others interested in taking ownership, being structured as a sole proprietorship can present challenges. You would be subject to capital gains tax as part of the transaction, and any buyer would also be assuming liability for business debts.
How are sole proprietors taxed in Utah?
With this type 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) reports for the purpose of income taxes.
The owner then pays income tax payments on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Utah has a single personal income tax with a flat rate of 4.95%. This means that, no matter how much income you report on your income tax return, the rate will remain the same.
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, the tax is not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and property taxes that are applicable. Utah has a relatively low property tax rate, with the average effective rate being 0.58%. However, you must still apply these property taxes to any property used in your business. Utah has a sales tax rate of 4.7%, though different local jurisdictions can add additional sales tax that may bring the rate to as high as 8.7%.
If a sole proprietorship has any employees, they will also be subject to a range of payroll and employment taxes, including unemployment insurance.
A registered agent is required when forming certain business entities to serve as the formal contact between your business and the government. They may be sent materials in the mail or contacted for other reasons. A sole proprietorship does not require a registered agent, as the owner is considered to be the same entity as the business and will be contacted for any needs.
Most businesses in Utah will need to register for a seller’s permit, which allows them to charge and collect sales tax from their customers. The sales tax will be applied to physical property, like furniture or cars, while prescription medicine and home appliances are exempt. Groceries have a 3% reduction in sales tax. Utah also requires that digital goods and services are subject to sales tax.
Applying for a Doing Business As, or DBA, in Utah can be done online or in person through the Division of Corporations and Commercial Code. The application fee is $22 and it must be renewed every five years.
An EIN, or employer identification number, is used by the IRS for taxation purposes. Because a sole proprietor files only personal income taxes, they do not need an EIN and can use a personal Social Security Number.
However, if a sole proprietorship has any employees, they will need an EIN to file federal taxes related to employment.
To form a sole proprietorship, no formal registration is required, so it does not need to be renewed. A sole proprietorship usually terminates automatically when the owner dies or is otherwise incapacitated. The proprietor can also transfer the business to another, who would become the new sole proprietor. It is also important to renew any licenses, permits, and DBAs that require upkeep.
Annual reports are required in Utah for certain business entities, but sole proprietorships are not among them. Taxes for sole proprietorships are filed as a part of the personal income taxes for the business owner. Annual reports are required for structures such as LLCs, corporations, and s-corporations.