Starting a business requires you to select what form of business entity to establish. And if you decide that you want your solo business to remain managed and run by yourself, with no intent to expand just yet, you might consider starting a sole proprietorship.
In Maryland, starting a sole proprietorship means you have to comply with the state and local licensing and taxation requirements. Before learning everything you need to know about how to start a sole proprietorship in The Old Line State, let’s recap what a sole prop is.
What is a sole proprietorship?
The simplest and most common structure used to start a business in the United States is called a sole proprietorship. These businesses are formed when a single owner forms an unincorporated business and runs that business as an individual.
In a sole proprietorship, there is no legal distinction between the owner and the business. This means the owner is entitled to all profits raised through the business and files them as part of their individual taxes. However, this also means that any debts and losses are attributed to the individual, as well as them being implicated in any lawsuits brought against the business.
Who is a sole proprietorship best for?
If you are planning to start a business along with a partner or multiple partners, a sole proprietorship is not an option. The structure will be a good fit only if you plan to operate your startup independently, or with employees who report to you as the owner.
Many people choose a sole proprietorship if they need to quickly start their business or want to avoid filing fees and paperwork. In fact, if you are running the business in your own name, there is no paperwork to fill out at all to register your business. This allows the business to get up and running quickly with no friction.
A sole proprietorship comes with personal liability and it may be more difficult to secure a line of credit or investments.
How to set up a sole proprietorship in Maryland
1. Choose your business name
Maryland 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 Maryland Department of State’s website to see if the name you chose is taken or if something similar exists.
In Maryland, 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
Once you thought of a name for your sole proprietorship and checked for its availability, you can go ahead and file the name online on Maryland’s Maryland Business Express on their Department of State Website. You can also find the Trade Name Application form here. The filing fee costs $25, but if you want to expedite the filing process, you must pay an extra $50, which gives you a total of $75.
You can also file directly when you visit the Department of Assessments and Taxation. The walk-in hours are between 8:30 am and 4:30 pm and same-day service fees need to be paid by cash, check, or money order.
You will need to fill out the form with your trade name, address, business description, and signature. Once approved, the trade name will be valid for 5 years and must be renewed within the last 6 months of the period to avoid re-filing.
The process takes 4 to 6 weeks, but with expedited service, the process would only take at least 3 to 7 days. To make sure that the process runs quickly, make sure that the trade name is available and all items on the form are filled out correctly.
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 Maryland’s One Stop Portal, 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. Depending on your business, you might need various permits, such as an Airport Zoning Permit, Apiary Registration, Adult Patient Registration, Liquor License, Captive Reptile and Amphibian Permit, and more.
You can go to Maryland’s One Stop Portal to see all the permits you need for your business and simply file for the ones you need. Take note that each permit varies in price, but some permits are free of charge, depending on the risk. However, applying for different licenses requires different assessments with no guarantee of approval.
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 small 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! You can begin thinking about things like marketing materials, landing your first clients, and how you want to grow over time.
How is a sole proprietorship different from an LLC or freelancing?
An LLC, or limited liability company, is another common structure used for small businesses in the United States. While an LLC can have a single owner, it can also be owned by multiple people working together. The key differentiator for an LLC is that it offers protection of the owner’s personal assets. As a legally separate entity, an LLC is liable for business debts and legal obligations, but the owner cannot be personally liable for these items. If the business fails, the owner could file for business bankruptcy without owing business creditors their own money.
If you’re wondering about the difference between freelancing and setting up a sole prop, you’d set up a sole prop if you plan to hire other writers to work with you. A freelancer, or independent contractor, can’t hire people, but a sole prop can.
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What are the advantages of a sole proprietorship?
Simplified tax preparation
For the owner of a sole proprietorship, tax preparation is not much more complicated than it is for any other private citizen. In preparing personal taxes, the owner will include all profits and losses related to the new business, which is calculated as a part of their income or expenses. This also means the tax rate stays at their individual rate as opposed to higher business and corporate tax rates.
Less paperwork and fees
To register most business structures, the state requires you to file your business name for inclusions on their directory and pay a fee. A sole proprietorship does not have to do this. There will be some paperwork and fees involved if you require licenses or permits, or you plan to operate under a fictitious name.
The sole proprietor of a business is responsible for everything, both good and bad. While liability is placed on that owner, they also enjoy complete control of their business. Any business decisions will be solely their responsibility, without worrying about pleasing shareholders or disagreements with a partner.
What are the cons of a sole proprietorship?
No asset separation
In a sole proprietorship, the business is not a separate legal entity, so there’s no legal separation between the assets of an owner and the business. While this makes things like taxes simple, it also means there is no delineation between the liabilities of an owner and their business. This means that if the business is not successful, any debts owed will fall to the sole proprietor, and if they cannot pay, it is their personal property that will be seized. In the case of a lawsuit where money is owed, the same is true.
Single point of failure
When only one person is responsible for an entire business, it means that they are the single point of failure. If a sole proprietor passes away, becomes incapacitated, or is incarcerated, the business is usually not able to survive. While a corporation can be taken over as a legally separate entity, a sole proprietorship must be run by the owner.
Less availability of funding
Many banks and investors do not like to offer funds to sole proprietors, as they cannot gain shares of the company or be sure that debts will be repaid. Many government grants and business loans also exclude sole proprietorship.
How are sole proprietors taxed in Maryland?
With this type of business, business 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.
The sole proprietorships pay taxes as personal income, and in the state of Maryland, the tax rates peak at 5.75% on taxable income over $300,000 for joint filers and $250,000 for single filers. The due dates for state and federal taxes in Maryland is the same as filing personal taxes, which is around April 15 every year.
As a self-employed individual, there are additional taxes necessary to pay. Based on the business’ income, the sole proprietor must pay Social Security and Medicare taxes. If the business operates at a loss, tax payments are not payable, but you will not receive benefit credits for that year.
There may be other employment taxes and property taxes that are applicable, such as real property tax. In Maryland, real property tax is appraised at market value and taxed on the assessed value. The assessment is 100% of the market value, and both state and local real property taxes are applied to the assessed value.
Some municipalities might also tax real property but the county rates will vary between incorporated and unincorporated areas.
If your charter filing or amendment shows you a “submitted status,” it has been submitted to the Department of Assessments and Taxation. Filings usually take 6-8 weeks, depending on the filing type. For expedited services, it usually takes 2-3 business days for filing a trade name and other business licenses.
You can edit a file that you already submitted to the Department of Assessments and Taxation if the status of your application is submitted. However, if the personnel has started reviewing and the status states that it is under review, you can no longer edit or cancel the filing. To avoid having to edit submitted filings, make sure all the information is correct by reviewing your application before submission.
No, you will have to file a separate application for a trade name with the State Department of Assessments and Taxation. However, without a trade name, your business can legally operate under the name of the owner or owners.
If you want to avoid online fees or cannot submit reports online, you can download Annual Report/ Personal Property Tax forms and submit them in person or via postal mail. If you need further assistance, you can send an email to the Personal Property Division of the State Department of Assessments and Taxation at [email protected].
You can have multiple businesses under one sole proprietorship, and you can file separate Schedule C’s on your personal income tax return. However, each business entity must have activities that are entirely different from each other. For example, a barber shop and a construction company are accepted. However, having two barbershops with different trade names is not allowed under one sole proprietorship.