When you consider starting a business, you may imagine endless paperwork and lawyers in order to handle all of the logistics. While the decision should never be taken lightly, starting out as a sole proprietorship can eliminate a lot of these steps and allow you to operate in South Carolina almost immediately.
Sole proprietorships are the most commonly chosen business structure because they’re fast and easy to start. However, before selecting a business structure, you should consider the tax and liability implications for your personal scenario.
We’ll explain how to start a sole proprietorship in South Carolina and help you determine if it’s the right choice for you.
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 South Carolina
1. Choose your business name
South Carolina 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 South Carolina Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In South Carolina, 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 or fictitious name
Your personal legal name is used to conduct all business transactions in a sole proprietorship. Some people choose to use a trade name, or a DBA, in order to operate under another name.
South Carolina does not require sole proprietorships to file this in any way, so there is no associated fee or process. However, you may still want to look up similar names in the database to ensure you don’t choose a commonly used name and confuse your search results.
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 South Carolina Department of Business and Professional Regulation (DBPR), though some areas like health care are licensed by independent areas.
The state of South Carolina does not have a general business license required to operate. However, most businesses will need to obtain a retail license or seller’s permit if they intend to sell or lease tangible goods or services. This license can be obtained through the Department of Revenue for a $50 filing fee.
Certain businesses and professions do require state-wide licensures, such as real estate and cosmetology. You may also need a professional license in order to operate.
You should also explore local regulations like building permits and zoning clearances where appropriate. At least 9 counties, including Charleston County and Richland County, require a general business license if your business is located there. Localities may also have professional requirements and licensure, as well as zoning laws you must follow.
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?
A South Carolina 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 South Carolina?
Simple way to start a business
South Carolina 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 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 South Carolina?
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.
Income tax rates in South Carolina can vary widely, with one of the highest top rates in the country at 7%, but also the lowest bottom rate. South Carolina does not have a separate Schedule C that needs to be reported for your income taxes, so you will use the same federal information and calculations in order to claim business profit and loss on your state taxes. You are responsible for reporting and paying an estimated tax on your income on a quarterly basis.
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 South Carolina comes in well below the national average at just 0.55%. Property taxes are collected by local governments on both real and personal property.
If your sole proprietorship has at least one employee, you will be required to register as a withholding agent for South Carolina state income tax. You will withhold this tax from each paycheck and remit it to the Department of Revenue on a recurring basis, the schedule of which is determined by the side of your business.
South Carolina levies a 6% sales tax on goods and most services, which you must charge and remit as a business owner. Counties may also impose an additional 1% sales tax if it is voted on by county residents.
No, there is no formal registration required for sole proprietorships. You don’t need to register a business name or fictitious name.
However, if a sole proprietorship has any employees, they need to register to withhold income tax. Additionally, any retail business will need to obtain a retail license to be able to charge and remit sales tax.
No general license is required by South Carolina, though businesses in certain counties may need to obtain a local general business license. Additionally, the type of business you run might mean that you need specific licenses, such as an Alcoholic Beverage License, a Bingo License, a Coin-Operated Device License, a Soft Drink License, or others.
A sole proprietorship will have all expenses and income filed through the owner’s personal income tax. Since South Carolina charges a state income tax, this will be included as part of your state filing. The income tax rate in South Carolina can range and be as high as 7%. Sole proprietorships must report and pay estimated taxes on a quarterly basis to the state.
Both DBA (or “doing business as”) and a fictitious name refer to a sole proprietorship operating under a name other than that of the legal owner. In South Carolina, fictitious names and assumed names are the most common terms used for this experience.
Sole proprietorships do not, however, need to formalize this name through the state of South Carolina.
A seller’s permit, or retail license, allows South Carolina businesses to collect and remit sales tax to the state. This requires an application and a $50 filing fee but does not have to be renewed once it is obtained.