Out of all the business structures in the United States, particularly in North Carolina, a sole proprietorship is the least expensive and easiest business structure to set up and operate. A sole proprietorship in North Carolina starts with a single person, a passion, and a business idea.
It’s easy to set a sole prop up in North Carolina because they do not impose any paperwork or requirements at a state level, except for the free online tax registration, which only takes a few minutes.
All you need to do is think of a viable business, and follow this guide to help you with every step of the way, from thinking of a business name to setting up the necessary county licenses you need.
So, if you are from NC and want to build a small business from the ground and maybe make it viable enough to live on your business income, you should definitely think about setting up a sole proprietorship– but first, what is a sole proprietorship exactly?
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 North Carolina
1. Choose your business name
North Carolina 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 North Carolina Department of State’s website to see if the name you chose is taken or if something similar exists.
In North Carolina, 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
If you plan to name your business something other than your legal name, you’re required to file a trade name with the state of North Carolina. Having an assumed name is ideal for your business. It allows you to use a different name other than your legal name.
Having an assumed name will also enable you to open a business bank account, which will make it easy for you to separate your personal finances from your business income. It makes your business easier to manage in terms of financing.
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 North Carolina 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.
Most North Carolina sole proprietorships are required to obtain licenses, permits, and zoning clearances depending on the nature of their business. If you are not sure what type of permits or licenses your business needs, North Carolina has an extensive list of permits and licenses on its website.
For example, you will need separate permits to sell liquor, serve food, teach hunting, do accounting services, cosmetic services, and more. Depending on the nature of your business, you might need to obtain more than one license.
You can visit the website to find out what your business needs to legally operate. In addition, if you need zoning clearances and building permits, you are going to have to check with your local city or county for the information you need.
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 North Carolina?
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.
The tax rate for sole proprietorships in NC is 15.3%, and you need to file it on or before the 15th of April each year. Taxable income in North Carolina includes sales tax and use tax. The taxable brackets change, depending on how much you make each year. For example, if you are making $18,201 to $37,000, you will be taxed 19 cents for every dollar you make.
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 state taxes will include tax on spirituous liquor, aviation gas, dry-cleaning solvent, 911 service charge for prepaid wireless, motor vehicle lease and rental, property tax, withholding tax, and more. To learn more about taxable business income, visit the NC Department of Revenue website.
You don’t need to register your sole proprietorship in North Carolina if it is run under your legal name. However, you do need to register for a tax ID, which enables you to collect taxes for products and services you sell. Anyone who is seeking to register a tax ID can simply use the online registration system. It is free and easy to register, as long as you have the necessary business information needed.
You don’t have to register if you’re using your legal name. If you plan to create a business name, you’ll need to register that with the state. To do so, you need your Social Security Number (SSN), Employer Identification Number (FEIN), and North Carolina Secretary of State Number.
No, once you have used the online business registration system, it isn’t necessary to mail in paper copies of the application form. However, if there is any additional information needed, the North Carolina Department of Revenue will contact you. From there, you may have to mail in the additional information needed about you or your business.
If you have all the documents and information ready, registering your business for tax, getting a DBA, and filing for permits and licenses should only take around 1 to 2 weeks in total. If you don’t need many permits regarding the nature of your business, you can get your business up and running in a week or less.