If you are thinking about becoming self-employed or have already started working as a freelancer or independent contractor in the state of Nevada, maybe it is time to level up your self-made business and create a sole proprietorship.
It is the simplest business format in the United States, and becoming a sole proprietor is easy. As long as you have a passion, skill, or products you can sell, the next step is making it official. In this article, we will guide you on how to start a sole proprietorship in Nevada.
We will let you in on everything you need to know, from naming the business, to obtaining all the requirements you need to get your dream business launched until it can stand on its own. Who knows? Maybe you can even build a full-blown business that will enable you to do your passion full-time.
But before we get to the good stuff, let’s define what a sole proprietorship means.
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 Nevada
1. Choose your business name
Nevada 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 Nevada Department of State’s website to see if the name you chose is taken or if something similar exists.
In Nevada, 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
A doing business as or DBA name is essential for sole proprietors. It enables businesses to assume a name separate from the sole proprietors’ identity. It will enable you to develop a brand and image that most potential customers will see as trustworthy. It will also make your company appear more legitimate for better chances of increasing sales.
Another benefit of filing for a trade name is that you can open a separate business bank account, which is another way to make potential clients more comfortable doing business with you.
To acquire a trade name in the state of Nevada, you need to think of an appropriate name for your business, verify if the name you want to use is available in the state, and file for a trade name.
When filing for a trade name in Nevada, you can visit the county clerk to get the necessary forms. You can click here to find the county offices in the state of Nevada. The fees start from $20 for filing, $6 for certification, and $.50 each if you need copies. The DBA will last for 5 years and you need to pay $20 for renewal.
For people who want to change their trade name, all you need to do is file a termination and pay $15, file for a new trade name and pay the regular $20 filing fee.
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 Nevada 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.
Nevada does not require sole props to register their business. However, you will need to obtain a city and county permit to legally operate and the necessary licenses and permits, such as a seller’s permit if applicable.
Some businesses need to obtain special permits, such as beauticians, contractors, liquor stores, and other special permits for different professions. You should also make sure that you are in a business zone or home occupation permit for home-based businesses.
If you are not sure what permits you need to operate your business, you will find the checklist for Nevada businesses here. It will show you everything you need in terms of state and local licenses, depending on the nature of your business.
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 Nevada?
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.
Taxes work differently, depending on the nature of your business. As a sole proprietor, you will need to report and pay taxes annually, and you might need to report items such as sales tax and use tax. You can also opt to pay estimated taxes quarterly. For more information on what counts as taxable income for sole proprietors in Nevada, you can register with NevadaTax to get more information.
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 entity 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 also subject to self-employment on their personal tax return if the business but only if the business makes a profit. As a sole proprietor, you must pay 15.3% of the self-employment income, which is the business’ net profit, allowing them to deduct one-half of the taxes on their personal tax return.
The filing fee is around $20, but it may vary from county to county. But aside from the $20 fee, you might need to get different licenses and permits you need to legally operate. For example, some bars and restaurants will need zoning permits and liquor licenses, which will cost extra fees.
The sole proprietorship is the simplest and most common business structure. However, there might be some disadvantages like you are held personally liable for the debts and obligations of your business, and the significant amount of responsibility handling your business. Plus, some investors do not usually invest in sole proprietorships.
Yes, you can hire employees as a sole proprietor if it will benefit the operations of your business. However, you will need to obtain an Employer Identification Number from the IRS. It is easy to get one, and you can get one almost instantly. Visit the IRS website for more information.
Sole proprietors are not considered employees. Therefore you cannot pay yourself wages and cannot have an income tax, social security tax, or medicare tax withheld. Sole props cannot receive a W-2 from their own business, meaning you can only file taxes as self-employed.