Kansas has a lot to offer entrepreneurs.
Like every state, Kansas governs how it handles sole props. If you selected a sole proprietorship as your business type, there are some rules and regulations you should know about.
We’ve created a guide to help you understand state expectations, and provide some helpful tips to get started.
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 Kansas
1. Choose your business name
Kansas 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 Kansas Secretary of State business search website called the Business Entitty Search Station (BESS) to see if the name you chose is taken or if something similar exists.
In Kansas, 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
There are a few steps to filing a trade name, or doing-business-as (DBA) name, in Kansas. First, you must go to the Secretary of State’s website. Once there, you will see a PDF for a TSA (Trade or Service Mark Application) form.
You can fill the form out online but then must print the completed application. You will send the form with the filing fee to the Kansas Secretary of State, 120 SW 10th Ave., Topeka, KS, 66612-1594.
The filing fee is $40 and must be made by check or money order and enclosed with the application.
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 Kansas Business One Stop, 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.
Kansas doesn’t require sole props to have a general business license issued by the state. However, local municipalities where you are doing business will likely require a business license. Depending on your occupation, the state may require a professional license. This could apply to any number of professions like chiropractor, nail technician, and accountant.
Local cities and counties may also require you to have building permits, occupancy permits, and zoning clearances for your business. This could happen if you have a building solely for your business, even if it’s on your personal property. There could be some zoning issues with having a home office as well, depending on the number of clients or customers you see or other factors relating to your industry and neighborhood.
You may have Homeowners Association (HOA) rules to follow too if you put a business either in your home or on your property. Some HOAs have restrictions on things like greenhouses, storage buildings, and workshops.
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 Kansas?
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.
Kansas has three income brackets in its state revenue calculations. However, it also distinguishes between filing single, married filing jointly, married filing separately and head of the household status.
The progressive tax starts at 3.10% paid by single filers making $2500 to $15,000 and those married filing jointly making $5,000 to $30,000. The rate goes up to 5.25% for those making $15,000 to $30,000 for single filers and $30,000 to $60,000 for those who are married and filing jointly. The final bracket is 5.7% and is attached to single filers making above $30,000 and married couples filing jointly with an income greater than $60,000.
Kansas doesn’t allow local taxes on wages. However, some municipalities may tax other types of income like dividends or interest.
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.
Sole proprietors are expected to pay property taxes whether they are renting a space or owning space for their business. Many run a business out of their home, so those property taxes would be paid as part of owning the home. In some cases, a home office or building on personal property may be a write-off for the business on your individual income taxes.
Kansas property taxes are considered high compared to other states. Its average effective property tax rate runs at 1.34%. This is the percentage of the home’s value paid in annual taxes.
State officials said local cities and counties in Kansas have increased property taxes up to triple the combined rates of population and inflation over the past 25 years. The reason is because of the rising cost of adding more employees and paying the new hires more money than in the past.
Kansas also taxes personal property like vehicles, manufactured housing, and other items. Those are appraised at anywhere from 5% to 30% of the appraised value, depending on the item.
Anyone who has a sole prop business based in Kansas and sells goods and services must pay state sales taxes. Those are 6.5% on everything except construction materials, prescription drugs, and food bought for meals for the homebound and elderly are exempt. All other food is not.
You are not required as the state doesn’t mandate a general business license. You can use your trade name without registering it. However, you will still need to register locally to get a business license, perhaps get an occupational license and collect sales taxes.
No, the state doesn’t require you to collect any sales tax on products shipped to out-of-state customers. However, those customers may be subjected to paying sales taxes in their own state so your business may need to collect that and send it to their state.
No, the only business entities required to file an annual report in Kansas are partnerships, LLCs or corporations.