How to Start a Sole Proprietorship in North Dakota

If your dream is to start a business and you are currently employed or self-employed, starting a sole proprietorship might be your best bet. It is the simplest business structure in North Dakota to start –  and the least expensive option. Plus, you can do it by yourself. 

In fact, you can start a sole prop in North Dakota today. This type of business gives you full control of your business and enables you to run it your way. You will need capital to start creating products and promoting your goods, but you don’t need much to get started.

So, if you have a passion that you want to turn into a viable business in Roughrider Country, this guide will show you the steps to get started. 

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 Dakota

1. Choose your business name

North Dakota 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 Dakota Department of State’s website to see if the name you chose is taken or if something similar exists. 

In North Dakota, 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 do business under your legal name, no official paperwork is required. 

If you want to use a trade name, however, you need to register it with the Secretary of State. A trade name is a name assumed by the sole proprietor, and in North Dakota, it’s a business name that’s different from your personal name. 

Registering for a trade name allows you an exclusive right to own the name in the state of North Dakota, and no other businesses can use the name, even if it is deceptively similar to the name you registered. 

A trade name provides legitimacy to your business and can be helpful when you open business bank accounts or apply for business credit cards to manage your sole prop’s finances. 

To register the trade name, you can visit the North Dakota Secretary of State’s First Stop, which is a one-stop-shop when registering any business of any structure. You can register for a trade name almost instantly. 

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 Dakota 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. 

Business licenses and permits in North Dakota are either issued by the Attorney General or Secretary of State. Depending on the nature of your business, you might need one or two licenses or permits to legally operate your sole proprietorship.

Licenses issued by the Attorney General include the alcoholic beverage license, amusement games license, fireworks license, tobacco license, and many more. The Secretary of State issues charitable solicitation licenses, notary public licenses, contractor licenses, and professional fundraiser licenses.

If you are not sure what type of professional licenses, zoning permits, and building permits you need for your business, you can visit the New Business Registration Portal.

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.

Next steps

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. 

Sole ownership

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 Dakota?

Income taxes 

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 in North Dakota must pay the entire amount of taxes themselves. Unlike working for a company, you only need to pay half and the company you work for pays the other half. 

Sole proprietors are considered owners and employees of their company, meaning they have to pay the full amount of taxes they owe. The tax rate for sole proprietors in North Dakota is 15.3%. Of that, 12.4% will go to your Social Security, and the other 2.9% will go to Medicare with no income limit or ceiling. 

Just like any other state, you need to file and pay your taxes on or before the 15th of April each year. Failing to do so can result in extra fees. 

Other taxes 

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. 

North Dakota exempts personal property from taxation. However, it does not exempt specific oil and gas refineries and other utilities. If your sole proprietorship has office equipment, inventory, accounts receivable, or materials in process, these items are exempted from personal taxation. Take note that they are only exempted for personal tax, meaning if you own an LLC or corporation, personal property will no longer be exempted. 

Property taxes in North Dakota is 0.99%, which is lower than the national average of 1.07%.

FAQs

A trade name is an assumed name that you can use to transact for your business. On the other hand, a franchise name is a name to which an independent operator has secured the rights from a franchiser to use and distribute products, trademarks, services, and more. 

Not all businesses need a franchise name to do business in North Dakota, but having a trade name is ideal for sole proprietors. 

Yes, you can register your domain name as your trade name. However, if it already exists as a different business in the state of North Dakota, you will need to settle for a different trade name.

If you are filing as a sole proprietor, almost every document needed can be filed online. This includes filing for a trade name, registering for taxation requirements, and getting the necessary permits you need to run your business. 

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