Following your passion and starting a business is a dream for so many people. However, it is always better to lay down the foundations of your dream business before quitting your day job and trying to make a living by doing what you love. If you don’t have the capital to form an LLC or corporation just yet, there are other options such as starting a sole proprietorship first.
A sole proprietorship is a simple business structure formed by a single owner. If you have a talent to produce products or a skill that you want to make money out of, starting a sole prop is an excellent way to do it. And if you do not know anything about the business side and requirements of starting a business in Nebraska, you came to the right place.
When starting a business, particularly a sole proprietorship in Nebraska, there are some requirements and checklists you need to go through before your launch. And this article will list down everything you need to know to get your sole proprietorship off the ground in Nebraska. But first, let’s define a sole proprietorship and find out if this business structure is for you.
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 Nebraska
1. Choose your business name
Nebraska 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 Nebraska Department of State’s website to see if the name you chose is taken or if something similar exists.
In Nebraska, 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 a trade name or Doing Business As (DBA) in Nebraska is essential for many sole proprietorships, especially if you want to create a name for your business separate from your legal name.
For example, your name is John Smith. Instead of doing business as John Smith, filing for a trade name will enable you to do business as any available name in the state. Having a trade name can also give your business an image or brand, making it appear trustworthy and professional.
Another benefit of having a trade name is that you can set up a business bank account under the trade name, instead of using your personal name, allowing you to successfully segregate your personal and business funds even though your business is not incorporated.
To file for a trade name in Nebraska, you need to complete the Application Registration of Trade Name or use the Nebraska One-Stop Business Registration System. The process usually takes a couple of weeks, and the trade name will be good for 10 years from filing. It costs $110 to file in the office and $100 to file online.
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 Nebraska 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.
In Nebraska, sole proprietors are not required to get a general business license. However, you need to obtain licenses and permits, depending on the nature of your business. If you will be selling alcoholic beverages, you will need a liquor license, and some businesses need specific permits.
You can always check the Nebraska Department of Labor Licensing’s list of specific business permits and licenses here.
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.
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 Nebraska?
Income tax return
With this type 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) reports for the purpose of income taxes.
The owner then pays personal 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 type of businesses your sole proprietorship engages in will determine which taxes are required to pay at the end of each year in Nebraska. The most common taxes come in the form of use tax or sales tax. Fortunately, you can determine which taxes are applicable for your business from the start when you register your business using the Nebraska One-Stop Business Registration Portal.
The portal will enable you to identify specific forms for your business. It will ask you pertinent questions about your business to identify which taxes are applicable but don’t worry because some links for research will also be provided to make sure you can answer the questionnaire.
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, 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.
The self-employment tax rate in Nebraska is 15.3%, and that consists of 12.4% for Social Security and 2.9% for Medicare with no income limit. You can also see the IRS website to look at the current Social Security income thresholds.
No, you don’t necessarily need a DBA or trade name to do business in Nebraska. However, it is ideal for every sole proprietor to file for one, especially if you want to do business under an assumed or fictitious business name. It is only required to get a DBA or trade name in Nebraska if you want to open a business bank account and create a different name for your brand.
You will need more or less $1000 to register a sole proprietorship in Nebraska. This amount will cover all the filing fees, IRS fees, county licenses, state licenses, and more. Depending on the nature of your business, you will probably spend less or more than $1000, but that does not include capital for your business needs.
Yes, a sole prop can hire employees, and there is no limit to how many employees you can hire. However, you will need to obtain an EIN for taxing purposes. You can also hire freelancers if you don’t need full time employees for the operations.
Yes, sole proprietors can get tax refunds in Nebraska based on their overall profits, tax write-offs, and loss. A sole proprietor pays taxes on behalf of the entire company and needs to report their personal income, taxes, as well as business income. Depending on the numbers, they may be entitled to a tax refund.