Thinking about starting a business in Alaska? The last frontier might be known for its snow and moose, but it has business opportunities too. However, the state does have some rules about launching a sole proprietorship in the state.
To help you navigate the new world of business, we’ve created a handy guide to help you start your own sole prop.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business structure with one owner. For tax and legal purposes, the business entity and the owner are considered the same entity. (It is not a legal entity).
This is the simplest version of a business that one can form, and many people who freelance or sell goods are operating as a sole proprietor without realizing it. Because there is no separation between the business and the small business owner, the owner is personally responsible for all of the business’s debts and litigation that the business is named in.
Who is a sole proprietorship best for?
By definition, a sole proprietorship is a business with a single owner. Anyone looking to form a partnership or have multiple owners should choose a different structure. A sole proprietorship will be a good fit for someone looking to maintain total ownership of their business who is willing to take on the liability associated.
Because a sole proprietorship is simple to start and requires no fees or paperwork, it can be a good option for anyone who needs to get a business up and running quickly. It can also offer a good test case for a business idea without any upfront requirements.
It can be more difficult to get funding and credit in a sole proprietorship, so if investments are required, having capital at the start can make this structure easier.
How to set up a sole proprietorship in Alaska
1. Choose your business name
Alaska 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 Alaska Department of Commerce to see if the name you chose is taken or if something similar exists.
In Alaska, 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
Alaska is unique in that it issues business licenses for all businesses and gives owners the ability to register any name, even if there’s already a business in the state with the same name. Anyone who wants a business license is entitled to one under state law.
In Alaska, you register your trade name with the Department of Commerce. You do so by registering a new business license application by filing the form online or through the mail. Every business in Alaska is required to have a business license, even if you are operating as a sole proprietorship.
All fees for new business licenses and business license renewals are currently waived.
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 Alaska Department of Commerce, Community, and Economic Development, 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.
A number of occupations in Alaska require professional licensing and you will need that if you plan to start a sole prop in certain industries. Some occupations requiring professional licensing include behavioral analysts, collection agencies, guardians and conservators, midwives, and massage therapists.
Go to the Alaska’s Professional Licensing Division for a complete list of occupations, more information, and how to register for a professional license.
You may also be required to have a local business license or permit to do some things like construction, remodeling, or counseling. There could also be zoning regulations you need to be aware of, especially if you plan on operating a business out of your home.
Some cities and counties have regulations on customers coming to your home and where you can store equipment. Check with your local city and county offices to learn about their specific regulations.
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 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?
Anyone who does work on a freelance basis can technically be considered a sole proprietor of their business. They will pay taxes individually and usually operate under their own name, assuming liability associated with their work. However, there are a number of ways the two can differ.
A sole proprietor is able to hire employees and is responsible for employment taxes, while a freelancer usually cannot do this without filing paperwork and effectively becoming a sole proprietor. Freelancers also do not have to adhere to the same local regulations that a business might and cannot purchase the same types of insurance. A freelancer or independent contractor is considered somebody who has a relationship with external clients, while a sole proprietorship operates as a small business.
In contrast, an LLC is another possible business structure for small businesses. An LLC, or limited liability company, must file articles of organization and register with their state. This also protects the owner (or owners, as an LLC can have multiple) from personal liability, and the business is treated separately for tax purposes. Because of this separation, LLCs are often given larger lines of credit or more likely to attract future investments in times of growth.
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What are the advantages of a sole proprietorship?
Fast and inexpensive startup
Unlike other business structures, a sole proprietorship does not have to register with the state or pay the associated fees. If a fictitious name is being used, there may be a registration process for the trade name, but it is optional. This lack of paperwork and cost means that you can start a sole proprietorship almost immediately and without bureaucracy.
In a sole proprietorship, all profits and losses for the business are included in the owner’s individual tax returns. This leaves the owner responsible for state, local, and federal taxes that include their business, but they are not subject to corporate tax rates or specific business taxes. Additionally, being self-employed offers tax credits and benefits to the owner.
Complete control over your own business
The sole proprietor of a business has complete control and is responsible for all decision-making within the business. With no partners or shareholders, you are free to run your business as you choose and take risks without implicating others.
What are the cons of a sole proprietorship?
Because the owner and the business are the same in a sole proprietorship, it can leave the owner vulnerable in multiple ways. Any business debts owed are also considered a personal debt, and any lawsuits against the business also implicate the owner. If these result in collections or seizures, the owner’s personal assets can be taken in order to meet the obligations of the business.
Difficulty with funding
If a sole proprietor wants to raise capital, they may have fewer options to do so. Without stock in the business to sell, investors are less likely to get involved. Banks may also be less inclined to offer credit because the owner will be responsible for the business loans in the end.
Risks of hiring employees
As long as they have a valid Employer Identification Number, a sole proprietor is able to hire employees as needed. However, if any legal issues arise related to an employee, it could put a strain on the owner as their own assets are on the line for lawsuits and other costs.
How are sole proprietors taxed in Alaska?
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 personal income taxes.
The owner makes tax payments on the income listed on their personal return, including income from business activity at the applicable rate for the year.
Alaska has a significant tax advantage for those with sole proprietorships. It has no state income tax. Alaska is only one in nine states that don’t have a state income tax return, which means you won’t pay taxes on the money you earn from your sole prop – at least not to the state. Federal taxes must still be paid.
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.
Another advantage of starting a sole prop in Alaska is that the state has no sales tax. However, local municipalities can charge up to 7.5% in a local option sales tax.
You will need to pay property taxes on buildings the business owns and there could be some additional property tax if you build a separate building on your property. However, Alaska offers a lot of property tax discounts, including those for senior citizens, veterans, and disabled persons.
Business licenses are issued by the state through the Corporations, Business & Professional Licensing office (CBPL) of the Alaska Department of Commerce, Community, and Economic Development (DCCED).
It can take several weeks to get a business license approved in Alaska.
It costs $50 to get a business license in Alaska and that includes sole proprietors as well as other types of businesses. The fee isn’t reduced for part of the year. It is $50 regardless of when you apply.
A business license in Alaska is good for two years.
It depends on the business and whether you require products from the continental U.S. While there are nearly no taxes in Alaska, getting goods transported there for sale is expensive.
Certified copies can be requested by submitting a Corporations Section a Copy Request Form (08-562) along with the $5 per copy fee. It takes between 10 to 15 days to process the request after the office receives it.
It depends on what type of business you have but trademarking your brand will protect you for 10 years and prevent others from using it during that time.
General liability insurance isn’t a requirement of the state but it could be required by cities and counties as part of doing business. Some industry professional groups may require it also.
Yes, you can hire others to work for you. However, you will need a federal EIN if you plan on issuing them W-2 forms.
No, Alaska doesn’t require sellers or resale permits because it doesn’t collect sales tax. However, local cities and counties may require sellers and reseller permits as well as vendor permits.
The state sees any company or individual that has sales, payroll, real or personal property within the state as someone who is doing business.