If you’re looking to start a business in Rhode Island, you may have looked into varying business structures and landed on a sole proprietorship. While this is a simple business structure with little paperwork, there are still rules and regulations you must follow when operating one, as well as limitations on your abilities as a business owner.
This guide will help you understand if a sole proprietorship is right for you and everything you need to know to successfully start one.
What is a sole proprietorship?
A sole proprietorship is a business entity that refers to an unincorporated business with a single owner. This is the simplest possible structure to set up a business. 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 as a part of your personal income. 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 Rhode Island
1. Choose your business name
Rhode Island law allows you to operate a sole proprietorship under your own name or under a selected business name.
While you can use your legal name, most people choose a specific business name. If you want to do this, you should search the Rhode Island Department of State’s website to see if the name you chose is taken or if something similar exists.
In Rhode Island, 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
2. File a trade name
In Rhode Island, trade names may be called either fictitious names or a Doing Business As (DBA) name. In order to obtain this permission, you must first search the name database to ensure your chosen name is available. You can also contact the state office at (401) 222-3040 to inquire about available names.
Once you have chosen a name, you can file a Fictitious Business Name Statement through the Rhode Island Secretary of State. There is an associated filing fee of $10. In addition to the state process, you must also register any assumed business name with the city or town clerk where you will be doing business.
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 Rhode Island 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.
Rhode Island does not require every sole proprietorship to obtain licensure, however, certain industries and occupations may require state licenses. The Department of Business Regulation issues these, and applications can be completed online. Licenses may be required for real estate agents, brokers, salespeople, wineries, breweries, and others.
In addition, local licenses may be required by cities and towns. For example, both Providence and Richmond have separate licensing standards that must be met by any business operating there.
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?
A Rhode Island 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 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.
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What are the advantages of a sole proprietorship in Rhode Island?
Simple way to start a business
Rhode Island 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 form of business that is suitable for the time.
What are the cons of a sole proprietorship?
No personal asset protection
In a sole proprietorship, you are considered the same entity as your business, which means you are liable for any financial aspects of your business. If the business has a financial obligation that can’t be met, your personal money 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 accounts and lines of credit as an LLC or a corporation. Government grants and funds awarded to small businesses are usually not available for sole proprietorships. 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 Rhode Island?
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 income tax on all of the income listed on their personal return, including income from business activity at the applicable rate for the year.
The average personal tax rate in Rhode Island is 3.75%, though this will vary based on total income and other factors.
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. Rhode Island has relatively high property taxes with an average effective rate of 1.53%, which is the tenth highest in the country. These can be applied to any owned property used to operate your business.
Rhode Island businesses will also be responsible for sales tax in the state. Any sales tax collected must be reported and filed with the state, usually by the end of the month, though businesses that collect under $200 in sales tax can file quarterly. In Rhode Island, most items are subject to sales tax besides prescription drugs and clothing, while most services are not. The state sales tax rate is 7% in addition to a 1% meals and beverage tax where applicable.
In Rhode Island, there is no paperwork required to become a sole proprietor and no associated fee. If you want to operate under a name other than your own, you can file a Fictitious Business Name application and pay a $10 fee, but this is not required.
You can start a sole proprietorship today with no formalities.
Some business structures require a registered agent to be named upon formation. This will be the person who handles all formal correspondence, like tax notices or legal documents.
Sole proprietorships do not need to select a registered agent as it is assumed the owner should be contacted for any legal purposes.
Sole proprietorships are able to hire employees as a part of their business. When they do so, the business may incur additional taxes such as unemployment taxes paid to Rhode Island and federal employment taxes.
It will also be required to work with Rhode Island’s Tax Office on withholdings and remitting state income taxes. There are no local or city taxes in Rhode Island, only state level taxes.
A fictitious name must not be the same as any other registered business name in Rhode Island, nor can it be so similar as to cause confusion with another name. Additionally, a name cannot contain any words that would confuse the business with a government agency (ie, Treasury, State Department, FBI). Certain words are restricted, such as bank or attorney when there is no licensure associated with that industry filed for the business.
At any time, you can choose to convert an existing business to another structure after operating as a sole proprietorship. In order to make this change, you will begin the process of forming an LLC through the state of Rhode Island, including registering the name of the business and obtaining any required licenses and permits. It may also be necessary to make changes to tax filing and employment documents as a part of this change.
Sole proprietorships are treated as personal income for tax payments in Rhode Island. This means that income is taxed at the same rate as the owner. The first $66,200 is therefore taxed at 3.75%, with rates rising with income. There is no local personal income tax within the state.