Ready to start a sole proprietorship in Louisiana? You’ll find a lot of business opportunities in this southern state. That is especially true for those in the food and hospitality industry as well as those associated with the plastics business, all of which are common businesses in the state.
If you’re planning to start a sole proprietorship, which is the most common type of business, it pays to know the ins and outs of Louisiana rules and regulations before you start.
We’ve created a guide to help you navigate the bayous of regulations and also include some advice on how to get your business cooking in the Gulf 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 Louisiana
1. Choose your business name
Louisiana 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 Louisiana Secretary of State website to see if the name you chose is taken or if something similar exists.
In Louisiana, 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
Filing a trade name in Louisiana can involve a few steps and each one costs money. You will go to the Secretary of State website for PDF forms to start. If you want to reserve a name, you can do so by filling out the form and paying $25 to the Secretary of State.
Those ready to register a trade name should fill out the registration form, print it, and include a $75 check or money order to the Secretary of State. You can also re-register your trade name at the site by getting the trade name assignment form. That also cost $75.
Any of these forms must be filled out and mailed with the appropriate fee paid by check or money order to the Commercial Division, Box 94125, Baton Rouge, LA 70804-9125. It can take a few weeks to process your request.
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 Louisiana 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 governments will also likely require a business license to operate a sole prop. They can require other types of permits and certifications, depending on the business and industry. That can include occupancy permits, fire marshall approval, health department approval, and zoning permits.
You may need to check to see what the rules are for operating your business out of your home. Some cities won’t allow that if you are seeing customers regularly. Some Homeowners Associations (HOAs) may have rules on that as well, particularly if you are growing or making a product or are performing a service at your home, like a mechanics shop or hair salon. You may need a zoning permit or variance.
Louisiana also requires those in certain professions to have professional licenses and will not let you operate your business without one. The state website on licenses has a list of professions where licenses are required and where to obtain them.
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 their 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 Louisiana?
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.
Louisiana is dropping its income tax rate for 2022 and the following years, although it will still have a progressive tax rate. The exact rate depends on whether you file single or jointly.
The state income tax rate starts at 1.85% for those making less than $12,500, which is lower than 2% in 2021. The second bracket is 3.5% for those making between $12,001 to $50,000, which dropped from 4%. The final bracket is 4.25% for those making more than $50,000. That’s a drop from 6% in 2021.
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 prop owners will be required to pay all real property taxes. That means they will pay taxes if they rent or own space for their business, although the rent may hide the tax since it typically is included in the monthly rent.
You will also need to pay property taxes on your home or other property if you do business there. While a home office is a tax deduction on the federal forms, it may add property value on state registers, which could mean more tax.
The property tax rate in Louisiana is good at .53%. It’s a low rate because the state has a homestead tax exemption, which reduces the owner-occupied property by $7,500 in assessed value. That lessens the overall tax.
Louisiana has a 4.45% sales tax that any business owner who sells goods and services collects. Additionally, local cities and counties can tack on a local option sales tax so you can be responsible for as much as 11.45% in sales taxes.
There are many ways to go when it comes to starting a sole prop in Louisana. However, the state’s top businesses are chemical, coal, and petroleum products and manufacturing. Of course, any small business has a shot with the right product and marketing power.
Louisiana has a few advantages over other states. It has ports that can help with shipping, depending on your business. It also has a low property tax and an easy way to register your trade name. There are some well-known colleges and universities there that could help make your business successful either in customers or in employees.
Polls show Louisiana a good place to start any business. It’s ranked as one of the best places to start and maintain a business.