The Midwest has always been the heartland of business for the country and Indiana is no different. Setting up a sole proprietorship in Indiana is easy to do, but before you set your heart on establishing a business in the State of Indiana, you should know the rules and regulations first.
Indiana, like all states, has its own laws regarding sole props. We’ve created a simple guide to help you through the process, answer some questions, and offer advice on how to start a sole prop in The Hoosier State.
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 Indiana
1. Choose your business name
Indiana 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 Indiana Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Indiana, 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
While the state is pretty lenient about using a trade name for business, banks and lenders in the state require you to file your trade name using a Certificate of Assumed Business Name or a DBA form. It must be notarized and be registered with the state.
You can find the form on the state business website.The fee is $20 online and $30 if applying by mail for most businesses.
Once you get to the state site, you can click on “start a new business” to guide you through the registration process.
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 Indiana 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.
Local cities and counties in Indiana require a business license to do business locally so you will need to check with the local city clerk to see what’s required and the fees involved. There could be zoning issues in play also if you are operating a business out of your home or on residential property.
Indiana requires professional licenses for some occupations so you will need one if you are in certain professions like hairstylist, in-home care worker, daycare worker, or certain other trades. A complete list can be found on the state professional licensing website. You can also register and get your professional license online through the state PLA site.
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 Indiana?
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.
Those who want to start a sole prop in Indiana will find the state taxes favorable. Indiana has a flat tax rate of 3.23%. Not only is that a low rate compared to other states, but the flat tax means you can make as much money as you want without paying additional taxes to the state.
However, all Indiana counties also have taxes that sole prop owners must pay as part of their income along with all other individuals and businesses. Local counties set their own rates but they range between .50% to 2.9%.
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 selling tangible goods or services must pay a sales tax in Indiana. This means you must register your business with the state and collect a 7% tax on everything you sell. This is a pass-through tax that consumers pay when they purchase goods and services. The tax collected by business owners, including sole prop owners, is sent to the state monthly.
Sole prop owners need to pay property taxes on their homes or any property they own, including any property where they do business. Indiana has a low property tax rate of .81%. That is lower than the national average of 1.07%. The average Indiana resident pays $1,263 in property taxes.
Sole prop owners are also required to pay personal property taxes in Indiana. Personal property includes cars, boats, RVs, and business equipment among other things. However, business owners who have less than $80,000 in personal property are entitled to a property tax exemption.
All businesses, including sole props, are required to register with the Indiana Department of Revenue. This is the agency that collects taxes.
It costs $31 to register your sole prop online with the Department of Revenue and $50 if you register it by mail.
Individuals who own a sole prop in Indiana receive all the profits from that business, which they report on their federal and state tax returns.
A sole proprietor can buy property in Indiana but must buy it as an individual as the business, in legal terms, doesn’t exist. The sole prop owner must qualify to buy property as any other person and pay all the required yearly taxes.
Yes, you can use a personal bank account to collect money from your sole prop business in Indiana. However, it may be easier for accounting purposes if you had a separate account under your DBA name.
Technically, no, you don’t pay yourself a salary as you will receive all the profits from your sole prop business. However, you can structure your sole prop to automatically put a salary into your personal account in order to properly budget your business expenses.
You can’t deduct your salary as a business expense on your taxes and must report all profit made in your sole prop even if you are keeping it in a separate account.