Starting and owning a business in Ohio requires many decisions to ensure success. One of the first decisions is to select the type of business structure you’d like. This has an impact on not only your steps to start a business but also your liability and taxes.
The most common structure in the country, and Ohio, is a sole proprietorship due to its quick and simple setup. But sole proprietorships still come with considerations you must make and regulations to follow.
We’ve outlined the process to follow to set up an Ohio sole prop.
What is a sole proprietorship?
A sole proprietorship is an unincorporated business entity that has a single owner. This is the simplest possible structure to set up as a small business owner. While there can only be one owner, a sole proprietorship can have employees and obtain an Employer Identification Number (EIN).
As a sole proprietor, your business profits are taxed on your personal income tax return. This makes the process simple, but can also expose you to personal liability in some cases.
Who is a sole proprietorship best for?
A sole proprietorship makes sense if you:
- Plan to start a business where only you are in charge and intend for that to be the case going forward.
- Want to call your business something other than your legal name.
- Plan to hire employees
- Want to set up a business quickly
How to set up a sole proprietorship in Ohio
1. Choose your business name
Ohio law allows you to operate a sole proprietorship under a name other than your own name. While you can use your name, most people choose a specific business name. If you want to do this, you should first search the Ohio Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In Ohio, a startup 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
- Contain profanity or words that are considered a slur
- Refer to business entities that are not accurate to the business, such as banks or insurance
2. File a trade name or fictitious name
A sole proprietorship will automatically assume the same legal name as the owner, however, you can decide to use another name for business purposes. Ohio allows you to do this by either using a trade name or a fictitious name. A trade name will give the owner exclusive rights to the name by registering it with the state. This can be done through Ohio’s business portal through the name registration form and paying a $39 filing fee.
Alternatively, you can conduct business under a fictitious name without registering through the state. You will still need to inform the Secretary of State of the name you plan to use, but it will not be registered as a trade name. However, a fictitious name does not protect you from other businesses registering the same name as you, so you may want to choose something unique despite the lack of a requirement.
To use a fictitious name, you must file through the Secretary of State by completing the Fictitious Business Name Registration and mailing it to the office listed. There is a $50 filing fee associated with this process.
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 Ohio 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.
Ohio does not require sole proprietorships to register through the Secretary of State, so there is no effective state business license. However, occupational and regulatory licenses may apply based on the type of business that is being conducted. Localities may also require business licenses, permits, and other processes to be completed to operate in their city or county.
Any business that sells, leases, or rents goods and services to the public will need to obtain a vendor’s license as well. This allows them to collect and remit sales tax from the public. A statewide license can be obtained through the Ohio Business Gateway, and each county may have its own requirements for a vendor’s license.
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, you officially have your own business! 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 Ohio LLC is a limited liability company that can be formed by one or multiple people. The primary difference in an LLC is that it is a separate legal entity from the owner. In other words, your business and your personal assets are separate. With an LLC, taxes are filed separately and the business’ liability does not translate to the owner.
Setting up a sole proprietorship is simpler than setting up an LLC because it does not have the same business tax implications.
If you’re freelancing, you might wonder if you need to set up a sole prop. If you plan to hire freelancers or other independent contractors, then yes. To hire others, you need a business structure like a sole proprietorship.
If you don’t plan to hire anyone, you can continue to freelance and pay taxes on the income without setting up a sole prop.
What are the advantages of a sole proprietorship in Ohio?
Simple way to start a business
Ohio sole proprietorships are incredibly easy to set up and do not require any filing process or fees at the outset. In fact, if you have done any freelance work or made money through a side hustle, you are technically operating a sole proprietorship. The simple and inexpensive start means you can quickly legitimize any business you are doing by opening a bank account and distributing formal marketing materials.
Your business remains yours
As the owner of a sole proprietorship, you have complete control of your business. Decisions will not need to take into account legal partners, shareholders, or partners, giving you the freedom to change your course or adjust as you learn about your business.
Easy transition to a corporation
Starting a business as a sole proprietor does not mean you will have to operate that way through the life of your business. At any time, you can convert a business to an LLC, corporation, or general partnership with the right paperwork and process. This allows you to feel out your business and settle on a model before you move to a corporate structure.
What are the cons of a sole proprietorship?
No personal asset protection
In the sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. The business’s debts become your financial obligation. Your personal assets and property can be used to meet that obligation.
Less access to funding
A sole proprietorship may not be given the same access to business loans and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for this form of business. You may also experience problems raising capital in the beginning since a sole proprietorship doesn’t carry the same credibility as an LLC or corporation.
Harder to sell your business
If your business grows to a place where you are profitable and have others interested in taking ownership, being structured as a sole proprietorship can present challenges. You would be subject to capital gains tax as part of the transaction, and any buyer would also be assuming liability for business debts.
How are sole proprietors taxed in Ohio?
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 owners make tax payments on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
Ohio’s income tax is levied at a rate up to 4.797%, based on how much you are reporting in income for the year. However, sole proprietorships have to pay Ohio’s commercial activity tax like all other Ohio businesses. The CAT is considered a tax on the privilege of doing business in Ohio and is computed based on the gross receipts of your business. The amount you will pay is tiered as follows:
- Gross receipts less than $150,000 have no tax
- Gross receipts from $150,000 to $1 million have a $150 tax
- Gross receipts over $1 million and up to $2 million have an $800 tax
- Gross receipts over $2 million and up to $4 million have a $2,100 tax
- Gross receipts over $4 million have a $2,600 base tax and .26% of all other gross receipts
Depending on which category the business falls into, there will be a different schedule for reporting and paying these taxes to the state.
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 average effective property tax rate in Ohio is one of the higher in the nation, at 1.57%.
Ohio also levies a 5.75% sales that most businesses are responsible for collecting and paying to the state.
Rather than a formal business license, Ohio requires businesses to register through the Secretary of State as a means of regulation. This is not required of sole proprietorships. However, they must still register their name through the department and obtain a vendor’s license in order to collect sales tax.
A sole proprietorship can be operated under your legal name by default. However, you can choose to use a different name by filing either a trade name or a fictitious name. A trade name will prevent anyone else from using the same or a very similar name for their Ohio business, while a fictitious name will not. Neither option protects you in states other than Ohio.
Ohio uses the same EIN that the federal government does rather than issuing another one. A sole proprietorship does not need to obtain an EIN, as they will file taxes under their personal Social Security Number. Some sole props will choose to get an EIN to make processes like opening a bank account easier. If a sole proprietorship has employees, they will need an EIN in order to file the appropriate withholdings through the IRS.