There’s a wealth of opportunity for those starting sole proprietorships in Iowa. The state is known for its farming and food production as well as renewable energy and advanced manufacturing. A sole prop in these industries could fare well, but so could others.
Iowa has rules and regulations about sole props and they can differ from other states. It pays to understand the laws before starting a sole prop in Iowa.
We’ve created a guide to help you understand sole proprietorships and how to start one in Iowa. It has contacts, laws, and how to register your sole prop to ensure it’s legal in the state. It also has advice and answers some common questions.
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 Iowa
1. Choose your business name
Iowa 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 Iowa Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Iowa, 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
Sole proprietors don’t file a trade name, also called a fictitious name or doing-business-as (DBA) name, with the State of Iowa. Instead, sole prop owners are required to register their trade name with the county recorder in the county where the business is based.
Counties have different fees for trade name registration so you will need to do some research in the county where you headquartered your business to find out the fees and 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 Iowa 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.
While you don’t register your sole prop with the state, you will need a business license from the local city or county where you are doing business. Most cities and counties require this to do any business legally. The city or county clerk can direct you on how to apply and the fees involved.
You may also need a professional license if you are in certain occupations like operating a daycare, working as a massage therapist, or in real estate. The Iowa Professional Licensing Bureau has more details about who is required to obtain a professional license and how to apply.
Local cities and counties may also have zoning requirements for sole proprietors, depending on the business. Since many people operate out of their homes, there could be restrictions on customers parking at your home or doing work out of your home or elsewhere on your property. You may need to apply for a zoning variance in certain circumstances.
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 Iowa?
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.
Iowans pay a graduated income tax, which isn’t the best thing for sole prop businesses. It starts low at .33% for those making the first $1,676 of income but goes up to 8.53% for those making more than $75,420 in income.
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.
Iowa has a statewide sales tax of 6% on all goods and services. Local cities and counties can also implement their own tax which can raise the total sales tax rate to 8%.
Additionally, sole props are responsible for property taxes if they own residential or business property. Iowa has a high property tax rate of 1.53%. That exceeds the national average of 1.07%. However, Iowa doesn’t collect taxes on personal property like cars, boats, and business equipment. Those are exempted.
You can do business under your own legal name or set up a new name for the business. Sole props as well as general partnerships are required to file their fictitious name or trade name, with the county recorder where they are basing their business.
Each Iowa county can have different fees but the standard fee is $7 to register a trade name for sole props and general partnerships. You can check the list of counties to get more information.
It depends on the county. Some counties have an online system while others may not. You will need to check with your county recorder to see if online filing is available.
Iowa is highly affordable to live so that will make starting a sole proprietorship there easier. The state was ranked by US News as the fourth in affordability across the nation.
Iowa is a heavy farming and food processing state so any business that concentrates on those industries would probably do well. Iowa has also geared up for renewable energy businesses so sole props that provide services or products in that realm could also do well.
You will need a federal employee identification number as a sole prop if you hire any employees. Most sole props use independent contractors so they don’t need an EIN.
You can file electronically through the Iowa Tax website or you can pick up an Iowa Business Tax Registration form from any Small Business Development Centers (SBDC) or accounting office. You can mail or fax the form to the Iowa Department of Revenue. The fax number is 515-281-3906 and the mailing address is Registration Services, Iowa Department of Revenue and Finance, P.O, Box 10465, Des Moines, IA 50306-0465.
You can contact any SBDC to ask about financing or any other business question. You can also contact the local Chamber of Commerce for help.