Becoming a sole proprietor is the most common business structure in New Jersey. It is an excellent choice for people who are not quite ready to form a full-time business or for people who are looking to start something on the side while working full-time.
It may be a simple business structure, but there are things that you need to take note of when starting a sole prop in New Jersey. Different states have various laws regarding sole proprietorships, and this article will guide you through the process.
In New Jersey, unlike most states, you need to register the sole prop with the state. Fortunately, this article will guide you through all of the steps to help you turn your passion into a business.
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 New Jersey
1. Choose your business name
New Jersey 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 New Jersey Department of State’s website to see if the name you chose is taken or if something similar exists.
In New Jersey, 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 an alternate name
You need to register your company’s name with the state of New Jersey. Registering the name in New Jersey will cost $50 to file, and it will be good for five years.
With a trade name or alternate name, you can legally do business under a different name, open a business bank account, and use it for advertising. You can register an alternate name online using Form C-150G, or renew your alternate name using Form C-150R. It usually takes 1-2 weeks to get approved, but you can add an extra $25 to expedite the service and process within 8.5 working hours.
You can either file online, by mail, over the counter, or through fax, but the fastest way is registering an alternate name online or over the counter.
Make sure you register the name before using it, otherwise you will have to pay an additional fee of $50 for the unregistered name.
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 New Jersey 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.
Aside from registering your business with New Jersey’s Treasury Department, you might also need to obtain specific licenses to operate your business. You can check the licensing and certification guide on the New Jersey Business website to check the specific licenses or occupational licenses required to run 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 New Jersey?
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.
Sole proprietors or single-member LLCs do not file a separate business tax return. Since they are treated as individuals, you will need to file an NJ-1040 or NJ-1040R return to report any business income and profit you earned from the business.
Sales tax in New Jersey is any taxable product or service, which you need to report and remit. Once you register your business with the state, they will send you a Certificate of Authority for Sales Tax, and this will enable you to collect tax that you will later remit during filing season. You must display the certificate in your place of business where all the clients can see it.
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 taxes might include property tax, use tax, and employer withholdings if you are a registered employer with the state. The list is extensive, but you can check here to see which businesses taxes apply to your sole proprietorship.
Business registration in NJ costs $50. Different states have different laws on registering sole proprietorships. While some states do not require you to obtain a state business license, New Jersey does require you to register. What you need to do is go to the State of New Jersey Department of Treasury website, particularly the Division of Revenue and Enterprise Services, then start the online registration here.
Yes, just like most states, you will need to obtain an EIN or employer identification number from the IRS. However, some sole proprietors who are not able to hire full-time employees hire freelancers or independent contractors. If that is the case, you don’t need to get an EIN.
Aside from registering your business with the state of New Jersey, some sole proprietors with different professions might need to obtain specific licenses to run their business. When selling liquor, you need a license. If you are a barber, accountant, or hunting instructor, you will need to obtain a specific license to legally sell your services in New Jersey. See the licensing and certifications guide to learn more about the necessary licenses you need.
No, an independent contractor does not need to register with the Department of Treasury. However, you still might need certain licenses to operate as an independent contractor, and still need to file your taxes using your form 1099 or file as an independent contractor with your Social Security Number, which is similar to filing taxes as a sole proprietor.