Idaho may not be on every entrepreneur’s radar but it is considered a good place to start a business and a sole proprietorship are one of the easiest startups to set up.
There are plenty of reasons to start a sole prop in Idaho. It is in the top ten for GDP growth and its sales and property taxes are some of the lowest in the country. It’s also ranked 7th in the nation for its startup job creation rate.
Before you go full force into a sole proprietorship, it’s best to know what the state’s rules and regulations are. Idaho, like all states, operates on its own rules for sole props. We’ve prepared a guide to help you develop a successful sole prop business in Idaho.
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 Idaho
1. Choose your business name
Idaho 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 Idaho Secretary of State website to see if the name you chose is taken or if something similar exists.
In Idaho, 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
State officials also suggest you do a trade name search before you attempt to file for a doing-business-as (DBA) name in Idaho.
Sole proprietorships are only required to register the names in Idaho and no other forms are needed. The name and entity type must be registered before you start doing business.
To register your trademark, go to the business filings on the Idaho Secretary of State’s website. Click on “register trademark.”
That will take you to a form registration icon. Click on the icon. It will give you an option to file online. Click on that and that will take you to the login page where you will create an account to register your trade name.
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 Idaho 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.
Some professions require state licensing in Idaho. To find out if that applies to you, go to the state’s licensing and permits website and it will direct you to the Business Wizard. You will need to answer some questions and a list of addresses and phone numbers of various agencies will pop up for you to contact regarding professional licenses, certifications, and other similar required papers. There is a fee for these licenses but they can vary depending on the profession.
You could be required to have certain zoning requirements, especially if you are operating a business out of your home. Local cities and counties will have that information and can guide you on how to apply for zoning permits and variances.
Sole props are also required to get business licenses from local municipalities to do business. These are obtained where the headquarters or base is located. Fees for these types of licenses can vary from city to city or in various counties.
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 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 Idaho?
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.
Idaho has a graduated income tax rate that starts at 1% and goes up to a maximum of 6.5%. You must file a state income tax form if you are a resident, part-time resident, or a non-resident who has a source of income within the state.
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.
Idaho has a 6% sales tax and businesses, including sole props, are required to collect it on goods and services they sell. Sole props must also pay property taxes if you own a building for your business and could pay more taxes if you operate your business in a building on your property. You will pay your home property taxes as you always have and may get a deduction for having a home office.
Businesses related to healthcare and social services are the most common small business in Idaho. There isn’t a breakdown on how many are sole proprietorships.
Yes, you can run a business out of your home in Idaho but there are some legal requirements. You must register the entity type and name with the Idaho Secretary of State and the primary use of the home must be a residence with the business a secondary use.
The state of Idaho doesn’t have a state business license. You will still need to register for a sales tax permit though.
As a sole prop, any people working for you should be listed and paid as an independent contractors. Those who start hiring employees will need an Employer Identification Number (EIN) and may need to change the entity type.
Those who are selling products to customers online will need to obtain a reseller’s license from the State Tax Commission.
You can file online by going to the Idaho State Tax Commissioner’s Access Point or you can fill out Form 850 and pay by mail. The address is Idaho State Tax Commission, P.O. Box 76, Boise, ID 83707-0076.
Idaho itself doesn’t have a self-employment tax but collects it for the federal government. The present rate is 15.3% and it applies to all earnings you get from your sole prop or other business in Idaho You can deduct business expenses.
Yes, Idaho is considered a business-friendly state for sole props and all types of businesses. Small businesses make up 99.2% of all businesses in the state.