Arkansas has mountains, small and large cities, and plenty of opportunities to start a sole proprietorship business.
Before you decide to start a sole prop in Arkansas, you need to know all the facts about state laws and rules. Arkansas has its own rules and regulations regarding sole proprietorships. You will also need to know its tax rates and other information.
We’ve prepared a guide to help you start your sole prop in Arkansas with all the data, facts and advice you need to get going and make your sole prop successful.
What is a sole proprietorship?
A sole proprietorship is a business structure in which the business is unincorporated and has a single owner. For tax and legal purposes, the business and the owner are considered the same 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 owner, the owner is personally responsible for all debts and litigation that the business is named in.
Who is a sole proprietorship best for?
By definition, a sole proprietorship is an unincorporated 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 Arkansas
1. Choose your business name
Arkansas 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 Arkansas Secretary of State to see if the name you chose is taken or if something similar exists.
In Arkansas, 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
You will need to go to the Arkansas Secretary of State Business page to file your trade name. There is a link to file a fictitious name online. You can also file it by mail by mailing the form to the Secretary of State Business Commercial Services Division, Suite 250, Victory Building, 1401 West Capitol Ave., Suite 250, Little Rock, AR 72201. The filing fee varies from $15 to $25 depending on the business. It can be cheaper to file electronically than by mail.
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 Arkansas Department of Labor and Licensing, 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.
Some occupations must have professional licensing to do business in Arkansas. They can include professions like nail technicians, counselors, massage therapists, and construction trades. Arkansas is stricter on professional license requirements than many other states in requiring almost two years of experience, as well as passing a final exam. Fees to get a professional license can be around $200 in Arkansas.
Sole props will also need a business license from their local city or county to operate. Fees vary from municipality to municipality. You may also need a zoning clearance or variance if you choose to operate out of your home or within a building zoned for another purpose. A local city official can guide you on those requirements.
There could be other certificates you will need as a sole prop, depending on your industry. Some food operators would need a certificate from the Department of Health or USDA. Farmers could need some special permitting from either the federal or state government. You could also need some health certifications or food service certifications if you are operating in a health field or food service business, even as a sole prop.
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! With a solid business plan, you can begin doing business, generate marketing materials, land your first clients, and plan for growth.
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. An 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 form of business. An LLC, or limited liability company, must file articles of organization and register with their state. This also protects small business owners (or owners, as an LLC can have multiple) from personal liability, and the business is treated as a separate legal entity 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 personal income 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 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 prop?
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 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 property 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 personal assets are on the line for lawsuits and other costs.
How are sole proprietors taxed in Arkansas?
With this type of business entity, 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 on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Arkansas has a bracketed system of income taxes. Those earning less than $5,099 pay nothing and those in the highest income bracket pay 4.9%. That bracket starts at $91,801. Those making more than that pay an additional percentage of between 2% and 5.9% based on the amount of money you earn above $91,801.
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietorship 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.
Arkansas has a 6.5% sales tax rate. Anyone selling goods and services must collect a sales tax for the state. Local municipalities may also have additional taxes. You may also need to pay property tax if you own a building for your business or have a building on your residential property.
You can start a sole prop business in Arkansas without filing any legal papers with the state. However, you will still need a local business license and other required certifications.
No, income from a sole proprietorship in Arkansas is earned by the business owner. The business owner pays taxes of his income to the state.
Those wishing to dissolve their sole proprietorship must submit a completed dissolution form by mail or in person to the Arkansas Secretary of State, Business and Commercial Services. The state doesn’t allow you to submit articles of dissolution electronically.
A sales tax permit costs $50 in Arkansas. There could be other business registration feeds that apply to some businesses.
Yes, all items sold in Arkansas are subject to the 6.5% sales tax rate.
Yes, you can work your sole proprietorship business out of your home in Arkansas. However, there may be some restrictions depending on the business, customers coming to your home, vehicles, and other typical concerns.
Those sole props who wish to sell online need to meet the same requirements as all other businesses. They need a business license from the local municipality and to register for sales tax registration.
Any vendor who sells services or property that’s subject to Arkansas sales tax must register for a permit under the Gross Receipts Tax Law.
You can register online by going to the state website and filling out the form. The form can be done electronically.
It depends on the city or county where your business is located but a business license can cost between $50 and $1,000. Some of the cost calculation depends on the type of business you have and your inventory.