You have an idea for a business and are ready to take the next steps. This is an exciting and slightly overwhelming time, and the additional processes and regulations required may feel intimidating.
For this reason, many Wisconsin entrepreneurs set up a sole proprietorship since it’s the simplest business structure available. If you decide a sole proprietorship is right for you, the process to get up and running is below.
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 Wisconsin
1. Choose your business name
Wisconsin 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 Wisconsin Department of Financial Institutions’ website to see if the name you chose is taken or if something similar exists.
In Wisconsin, a startup 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
- Use a business entity suffix, like LLC or Corp, that is not accurate to the business structure
- Use the word “insurance” unless clear the business is not an insurance company
- Imply that the business is organized for an unlawful purpose
- Give the impression that the company engages in architecture, professional engineering, or designing without approval
- Include the word “cooperative” where there is no approved cooperative association
2. File a trade name or fictitious name
If you choose to operate your sole proprietorship under a name besides your legal name, you are allowed to register a trade name. To do so, you’ll file a certification of trade name with the County Register of Deeds in the county where your primary business is housed. Expect to pay a $30 fee.
There is also the option to file your business name as a trademark through the Department of Financial Institutions. This is not mandatory but will offer state-wide protection against others using the same name. You need to fill out a Trademark Registration form through the state and pay a $15 fee.
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 Wisconsin 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.
Wisconsin does not issue a state-level general business license, though they require many occupational permits and certificates for certain categories of work. The best way to determine if you require any license is through the One Stop Business Portal.
Each city may also have licenses and permits that they require of businesses. For example, Appleton, Green Bay, and Madison each have a general business license requirement.
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.
Wisconsin also issues EINs for employers who pay wages that are subject to withholding of Wisconsin income tax. Businesses are required to report taxes and file a range of employee reports which may require the use of this state EIN during registration.
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 Wisconsin 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 Wisconsin?
Simple way to start a business
Wisconsin 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 Wisconsin?
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 owners make tax payments on all of the income listed on their personal return, including income from business activity at the applicable rate for the year, which currently tops out at 7.65% in Wisconsin.
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. The Wisconsin property tax rate averages at 1.73% and is calculated based on the value of the applicable property.
Almost every business in Wisconsin must obtain a seller’s permit, which allows businesses to collect and report sales tax on things like retail sales, leases, or rentals of tangible personal property or services. The state has a 5% sales tax rate and each locality may tack on an additional sales tax.
Any employer, including a sole proprietorship, who pays wages subject to withholding of Wisconsin state income tax will need an EIN. You can apply for a Wisconsin EIN through the Wisconsin Department of Revenue using the Business Tax Registration form. This is the same form used to apply for a seller’s permit.
If your business is subject to sales tax, you will need to obtain a seller’s permit in order to collect that sales tax. You can apply for this permit by using the Business Tax Registration Form available through the Wisconsin Department of Revenue. This is the same form used to apply for a Wisconsin EIN.
When you use a name other than your own for a business, it is known as a trade name and often you have to register this name. In Wisconsin, this process is known as a trademark through the state.
These have the same implications, where no one else can use the same business name as long as yours is registered. However, this will only apply within the state of Wisconsin without a national trademark in place.
Wisconsin has a statewide sales tax of 5% imposed on the price of retailers who sell, license, or rent a tangible personal property and certain taxable services. In addition, each county can adopt a county tax of 0.5% on the same items. Prescription medicine, groceries, and gasoline do not have sales tax applied, but the majority of services are taxable under the state’s law.
Wisconsin does not require sole proprietors to register their business or apply for any certificates that carry fees. A sole proprietorship can be started with no upfront costs. However, if the business needs to operate under a trade name, there is a $15 to $30 filing fee and certain licenses and permits may also have associated fees. In addition, there is a $20 registration fee for a seller’s permit in Wisconsin, which is required for most types of business.