If you have a business idea, starting a sole proprietorship is an excellent way to start making money. Out of all the business structures available in Montant, a sole proprietorship is the simplest and least expensive form of business to start; making it the perfect option for individuals.
Without talking to partners, potential investors, or loaning money from the bank, you can start a business that you own with a sole proprietorship.
If you have a passion or skill for serving and creating products, but do not want to risk a lot of money, a sole proprietorship is your best bet.
Don’t know where to start? This article can help you through every step. From naming your company to reporting taxes and obtaining the permits to legally operate, this guide has the answers.
After reading this article, you will know everything you need to know about starting a sole prop in Montana. But before we get into the good stuff, you might want to know more about sole proprietorships.
What is a sole proprietorship?
The simplest and most common business entity used to start a business in the United States is called a sole proprietorship. These businesses are formed when a single owner creates an unincorporated business and runs that business as an individual.
In a sole proprietorship, there is no legal entity created, so there’s no difference 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 personal income 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 business entirely 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 Montana
1. Choose your business name
Montana 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 Montana Department of State’s website to see if the name you chose is taken or if something similar exists.
In Montana, 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 for an assumed business name or trade name in the state of Montana is mandatory if you want to use a business name that is different from your legal name. The filing fee is $20, and you can fill out this form and submit it to the Secretary of State in Montana.
Alternatively, you may also file online, which is the quick and easiest way to file. Doing business under an assumed name is ideal for sole proprietors. This way, you can do business under a different name and add legitimacy to your business.
Many potential clients find it more trustworthy to transact with businesses that operate under an assumed name rather than writing checks to an individual. With that being said, having an assumed name will enable you to open a business bank account to separate your personal finances from your business.
3. Obtain licenses, permits, and zoning clearance if needed
Depending on the industry of your startup, you may need to obtain a variety of business licenses or permits. This is managed by the Montana Department of Revenue, 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 Montana require issue-specific business licenses and permits. You can view the full list on the Montana Official State website to get more information about the permits your business needs to legally operate.
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! 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 separate legal entity, an LLC is liable for debts and legal obligations, but the owner cannot be personally liable for these items. If the business fails, the owner could file for a 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 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 types of business, the state requires you to file your business name for inclusion in their directory and pay a fee. The 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, there is 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, the business’s debts fall to the sole proprietor, and if they cannot pay, it is their personal assets 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
With this business structure, finding startup funds could be tough. 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 business debts will be repaid. Many government grants and business loans also exclude sole proprietorship.
How are sole proprietors taxed in Montana?
With this form of 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) report on their income tax return.
The small business owner then pays taxes on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Before opening your business, you need to register to collect and remit taxes from the products and services you sell. It is very easy to register. You can either download, fill out, and mail this form to the Montana Department of Revenue, or you can use the TransAction Portal for a quick online registration.
The tax rate for sole proprietors in Montana is 6.75%. However, even if you don’t reach a specific number, the minimum tax for businesses in the state is $50. So whether you reach $50 for 6.75% of your taxable income, you will still have to pay the minimum rate.
The deadline to pay taxes is the same as most states, which is on or before April 15th each year. Failure to file before the deadline can result in fees.
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 business taxes that are applicable.
Other business taxes in Montana may include alcohol beverage taxes, general sales tax, tax credits, estates and trusts, natural resource taxes, wage withholding, tobacco and nicotine taxes, and many more. To view an extensive list of taxes your business might need to pay, you can visit the Montana Department of Revenue website.
You can get your business running in a matter of two weeks if you have all the documents and plans ironed out before starting the legal process. This includes tax registration, filing for a business name, and obtaining the necessary permits and licenses. Make sure you have all the documents ready before you get started with filing to ensure a faster lead time.
Aside from capital for infrastructure and the place of your business, you will need to gather information for filing the forms. It is different for most states, but in Montana, you are going to need your Social Security Number (SSN), Montana Secretary of State Number, and Employer Identification Number (EIN) if they are applicable. You might also need your business address, phone number, and other business information.
Sole proprietors and employed individuals get taxed the same in Montana. The only difference is that people who are self-employed or own a sole proprietorship need to pay the taxes on their own. If you are employed, your employer usually pays half of the 15.3% of taxes you owe each year. But as a sole proprietor, you are both an employer and employee of your business.
You do not necessarily need an attorney or lawyer to set up a sole proprietorship in Montana. However, a lawyer may help you understand the risks of having a sole proprietorship. The choice is yours.