A sole proprietorship is the very definition of going into business for yourself. You are the business and the business is you. And there’s nobody else.
Perhaps the most common form of business organization for startups, a sole proprietorship can be terrific and terrifying. The credit and the blame; the profit and the loss; the freedom and the responsibility; all of it is all yours – all the time.
The upside: It’s simple. It doesn’t cost much to set up and it’s easy to dissolve. The big downside is you’re personally liable for business debts. There are a handful of factors to consider when deciding whether a sole proprietorship is best organizing structure for your business. Let’s touch on a few of the biggies.
If business organizations – meaning the way companies are legally formed and structured – came in a build-it-yourself kit, the instructions would be the model of simplicity.
There are no complicated state laws surrounding the sole proprietorship. From a regulatory standpoint, the owner may need to register the business name as an assumed name with the Secretary of State (we’ll talk more about naming your business in an upcoming post), obtain the appropriate business licenses and tax identification numbers if necessary, and begin operations.
Not all businesses are regulated or require a license to operate in Minnesota. To find out if the business you’re considering requires a license, certification or permit, visit the License Minnesota website.
Sole proprietors must obtain federal and state tax identification number if the business has employees, even if those employees are members of the sole proprietor’s immediate family.
Let’s start with the feds. To obtain a federal employer identification number (EIN), file Form SS-4 with the Internal Revenue Service. Download Form SS-4 and the SS-4 Instructions.
Sole proprietors who do not have employees, who are not required to file information returns; who do not have a retirement plan for themselves; and who are not required to pay federal excise taxes in connection with their business generally may use their Social Security number as their Federal Taxpayer Identification Number (FTIN).
Now, the state.
A business must obtain a Minnesota Tax Identification Number if it is required to file information returns for income tax purposes, has employees, makes taxable sales, provides taxable services, or owes use tax on its purchases. Most businesses need a Minnesota Tax ID number; however, a sole proprietorship that does not have any of these tax obligations does not.
You may apply for a Minnesota Tax ID Number online, by phone or by filing form ABR -Application for Business Registration with the Minnesota Department of Revenue. To apply online, you’ll need your federal Employer ID Number (EIN)/Federal Taxpayer ID Number (FTIN), (Social Security Number in some cases); your legal name; the name of the business (Certificate of Assumed Name if applicable); business owner/owners name; business owner/owners social security number; contact name and email address; NAICS (North American Industry Classification Code); and the business begin date.
Sole proprietors who have employees also need an unemployment insurance employer account number. Registration should be done as soon as possible after the first wages are paid for covered employment. It must be done before the due date of the first quarterly wage detail report the employer is required to submit.
Using the Employer Self-Service System, you can register for an employer account with the state’s Unemployment Insurance system online or by phone. See step-by-step instructions to register a new account online.
The state prefers that the automated phone system be used only by employers who do not have access to the Internet. Call 651-296-6141 and press option 4. If the business is a result of a reorganization of, or acquisition from another business, additional information may be required before a tax rate can be assigned.
Those are the basic steps for forming a sole proprietorship, though sole proprietors who startup with employees – or who expect to have them in the future – should bone up on key issues for employers. Also, nothing we cover here should be taken as business or legal advice. It's not. And it's no substitute for the professional guidance of a lawyer and accountant.
Consultants at our Small Business Assistance Office can help you understand more about partnerships. And our network of Small Business Development Centers has experts located in nine main regional offices and several satellite centers statewide.
For a comprehensive look at partnerships, see our publication Guide to Starting a Business in Minnesota. Available for download in PDF, formatted for e-readers, or available in print (all free of charge), the book covers the major issues, questions and concerns about business startups.