Hawaii is gorgeous but it has some laws and regulations other states on the mainland don’t have and that can be good or bad for those seeking to start a sole proprietorship.
There are advantages and disadvantages to starting a sole prop in Hawaii. Tourism is the center of the business world on the island, so sole props that cater to tourists could be an advantage. Disadvantages include high taxes and expenses associated with getting products to the island.
It pays to know all the basics before opening up under a trade name in Hawaii. That’s why we’ve prepared this guide to help you understand the ground rules of operating a sole proprietorship. It will help you understand how to register, the state’s taxes, and local municipal rules.
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 Hawaii
1. Choose your business name
Hawaii 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 Hawaii Department of Commerce website to see if the name you chose is taken or if something similar exists.
In Hawaii, 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 can file your trade name, or doing-business-as name, in one of three ways in Hawaii. It can be filed online with the Department of Commerce and Consumer Affairs. It can also be mailed to the Business Registration Division, US Post Office Custom Office and Courthouse, 225 Merchant St., Room 201, Honolulu, Hawaii, 96813.
You can also file online with the Hawaii Business Express website. It costs $50 to get a trade name registered in Hawaii and approval can come in as little as five days. Your registration is valid for five years.
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 Hawaii 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.
A sole prop in Hawaii is also required to register for a general excise tax (GET) license and pay GET on their gross business income. You must all file both state and federal tax returns, get any special professional licenses if your occupation is required to have them, and obtain any local municipal permits and licenses required for your occupation.
Some businesses, like real estate, have specific zoning requirements in Hawaii so you will need to check to see if your occupation fits within current zoning laws. There may be additional forms to fill out to comply with the state zoning laws for certain businesses.
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.
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 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 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 Hawaii?
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) report 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.
Hawaii has some high income tax rates. It ranks second in the country for its 12.19% total tax burden.
The state set up 12 income tax brackets with the maximum marginal income tax set at 11%. Top earners paying the most taxes are those making more than $200,000 annually. There have been bills to raise the top bracket to 14% but so far those haven’t passed.
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.
Those doing business in Hawaii will need to collect a sales tax. Hawaii has one of the lowest sales taxes set at 4%, but it can go up to 4.5% if local municipalities also tack on a tax. Those taxes are expected to be paid monthly.
Hawaii also has one of the nation’s lowest property tax rates at .28%. Sole props will need to pay property tax on any buildings where they own for their business. They will also pay property taxes on their home but could get some write-offs for having a home office.
There are some exceptions where Hawaii doesn’t require every business to get a general business license. However, some may need other types of certification from agencies like the Department of Health depending on the business.
The State of Hawaii Basic Business Application must be submitted with a one-time $20 license fee. You can apply for this in the district offices but the state prefers it be mailed in.
Hawaii was ranked as the worst place to start any kind of business in the United States in 2018.
The types of businesses that thrive in Hawaii are homestay services, tour guides, customized tour services, farming, vacation rental services, virtual assistants, travel agencies, and taxi services.
You can file GET forms and taxes monthly, quarterly, or semi-annually.
Sole props or a single entity LLC in Hawaii is expected to have a Hawaii Tax Identification Number (HTIN).
You need to file a trade name application (T-1). The form is on the Hawaii Department of Commerce website.
No, the idea of a sole prop is that the business is run by one person. Bringing in a partner will require you to change your business structure to an LLC, S-corp or something else.
Sole proprietorships are exempted from registering with the Department of Commerce or business registration in Hawaii.
It is up to the sole proprietor to re-register the name either before the end of the five-year registration or up to six months after the expiration of the trade name.
You can cancel your trade name or service mark registration by filing a request to cancel it as long as it’s signed by the registrant.