If you’re looking to enter the world of a one-person startup, West Virginia provides a defined process to follow.
Many people throughout the state choose to set up a sole proprietorship as it is the simplest structure to form. Making this decision means understanding the rules and regulations that apply, as well as any limitations that may apply to these types of businesses.
Before making this important decision about your business, read on to learn more about how sole proprietorships operate in West Virginia.
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 West Virginia
1. Choose your business name
West Virginia 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 West Virginia Secretary of State’s website to see if the name you chose is taken or if something similar exists.
In West Virginia, 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 DBA
In order to operate under an assumed name, rather than your own legal name, a sole proprietorship must obtain a Doing Business As or DBA. This can also be known as a trade name in West Virginia.
When you have confirmed your name is available, you can claim it by registering online through the West Virginia One Stop Business Portal. For a sole proprietorship, there is no fee associated with obtaining a DBA, though additional can be paid to expedite the process. There is a specific form to use when you are obtaining a DBA for a sole proprietorship, so be sure to use the proper form and include all information requested.
Your DBA will not need to be renewed once you have completed these steps.
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 WV One Stop Business Portal, 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.
West Virginia does not require sole proprietorships to obtain a general business license, but other permits may be necessary depending upon the nature of your business. The West Virginia One Stop Business Portal will provide information on what permits you need to be compliant with and how to apply for these.
Cities and counties will often have their own license and permit specifications as well. For example, while no state licensure is required, a business license is mandated in cities such as Huntington, Morgantown, and Charleston.
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 West Virginia 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, 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 West Virginia?
Simple way to start a business
West Virginia 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 West Virginia?
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.
West Virginia uses an income tax, with rates ranging from 2.36% to 5.12% of total taxable income.
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. Property tax rates can be set by countries and municipalities within the state, so they can vary depending on the location of your business.
The state sales tax rate is set at 6%, though the final amount is based on a rounding system. In addition, West Virginia has excise taxes for particular industries. West Virginia defines excise taxes based on the industry and types of goods sold. Examples of this tax include:
- Beer and Wine Tax, applied to any non-intoxicating beer or wine
- Business and Occupation Tax, imposed on anyone engaging or continuing in a public service or utility with a number of exceptions
- Health Care Tax, relevant to those who provide health care related services
- Cannabis Dispensary Tax, a 10% tax on gross revenue on medical cannabis at a permitted dispensary
- Soft Drink Tax, applied to bottled soft drinks, syrups, and dry mixtures
- Solid Waste Assessment Fee for any solid waste disposed of at a facility in West Virginia
- Tobacco Tax imposed on any tobacco products including cigarettes
You can start a sole proprietorship without any formal registration process in West Virginia. However, you may need to register a DBA if you choose to operate under a trade name. You may also need to file in other scenarios, such as with the state tax department to hire employees or with the IRS to obtain an EIN.
When filing a DBA, there are certain rules that limit what you can choose as your trade name. For a sole proprietorship, you cannot imply another type of business by including things like “LLC” or “Corp”.
You can also not include the terms banking, insurance, engineer, or engineering if you do not meet the requirements to operate these types of businesses.
State level laws prevent names that are too similar from being used in creating businesses, including names registered as a DBA. However, these rules do not usually apply from state to state, so someone outside of West Virginia could use the same name you have chosen. A trademark can be applied to a DBA at the national level through the U.S. Patent and Trademark Office.
A sole proprietorship with no employees is not required to obtain any insurance, though it may be recommended. Because of the liability, an owner takes on, general business insurance is often a good choice. However, any business with one or more employees is required by the state of West Virginia to have workers’ compensation insurance. This includes sole proprietorships.
Any business that sells goods or services to the public must charge a sales tax in West Virginia. This includes sole proprietorships. In order to do so, they must first obtain a seller’s permit through the state that allows them to collect this tax on behalf of the government. With this in place, a business can calculate sales tax, collect it upon purchase, and report it to the government while remaining in compliance with all laws.