How to Start a Sole Proprietorship in Colorado
Starting a sole proprietorship in Colorado is a relatively straightforward process that allows individuals to operate their businesses. While no formal setup is required, taking certain steps can help ensure a smooth start and protect your assets. This guide will walk you through the key steps to starting your new business in Colorado.
What is a sole proprietorship?
A sole proprietorship is a simple form of business entity. It’s owned and run by a single person responsible for the business and its debts. They are simple to set up and, because of this, are popular with entrepreneurs. Unlike other business structures like LLCs or corporations, there’s no legal divide between the business and the owner.
While a sole proprietorship offers simplicity and flexibility, it has some downsides. The main disadvantage is the lack of asset protection. As a sole proprietor, your belongings, like your car or house, are at risk if your business gets into debt or has any legal duties.
A step-by-step guide to starting your Colorado sole proprietorship
Choose a business name
A sole proprietor must use their legal name as the name of their business. If they want to use a different name, they must file a “doing business as” (DBA), also known as a trade name in Colorado. A DBA allows you to operate under a different name and can be useful in creating a brand and marketing your business.
To file a DBA, follow these instructions:
- Choose a business name: Think of a few potential names for your business. Try to make the name memorable while describing what your business does.
- Check availability: Colorado business names do not need to be unique, but we recommend choosing a unique name. Before completing your paperwork, you can search for the Colorado Secretary of State’s business entity search to check that there are no existing businesses with the same or similar name.
While there are no strict rules on using the same name as another business in Colorado, choosing a name that distinguishes your business and avoids trademark infringement is generally a good idea. We recommend checking the US Patent and Trademark Office’s trademark database to ensure you are not infringing on another company’s intellectual property.
- Check online availability: Before finalizing your business name, it’s important to check the availability of the corresponding domain name and social media handles. This will help establish an online presence and be an effective marketing tool for your business.
- Register the business name: To officially claim your trade name, file a Statement of Trade Name of an Individual online through the Colorado Secretary of State’s website. You must file online; paper forms are not accepted. The filing fee for your DBA name is $20. You will be asked to provide:
- Your trade name
- A description of your business
- The effective date of your trade name
Obtain an (Employer Identification Number) EIN
As a sole proprietor with no employees, getting an EIN might not be necessary. Your Social Security Number (SSN) can be your tax ID.
However, we do recommend getting one as there are many benefits:
- Business banking opportunities: An EIN allows you to open a business bank account separate from your finances, making tracking your business income and expenses easier.
- Establishing business credit: An EIN enables you to establish a credit profile for your business, which would be useful if you apply for business loans or credit cards.
- Eases the hiring process: If you plan to hire employees in the future, having an EIN is necessary for reporting wages and fulfilling other tax obligations.
- Enhances business privacy: Using an EIN instead of your Social Security Number (SSN) on business-related documents can help protect your personal information.
- Prepares for business growth: If you plan to expand your business or change its structure, having an EIN will make the transition smoother.
You can apply for an EIN through the Internal Revenue Service (IRS) website. The process is free, and you will receive your EIN straight away after completing the online application.
You can apply for your EIN here.
Obtain Colorado business licenses, permits, and zoning clearances
Before starting your sole proprietorship in Colorado, it’s important to determine if you need any specific business licenses, permits, or zoning clearances. The requirements vary depending on the nature of your business and its location.
Colorado does not require sole proprietors to get a general business license.
- The Colorado Department of Regulatory Agencies issues various business licenses and permits.
- You can visit the Colorado Professional Licensing website to check if your occupation requires a professional license.
- You should check with your local city and county governments to understand any specific local regulations that may apply to your business.
Register for Taxes
If you are running your own business as a sole proprietor, it’s important to remember that your business taxes will be filed along with your personal tax returns. When you submit your annual Form 1040, you must include a Schedule C to report your business’s income, profits, and losses for the year. By doing this, you’ll be able to accurately report your business’s financial information and stay on top of your tax obligations. You do not need to acquire a federal tax ID number if you have no employees.
As a self-employed sole proprietor, you owe self-employment tax contributions for Social Security and Medicare, which you can calculate and report using Schedule SE.
Additional state and local taxes
The specific taxes you need to register for depending on your business activities. In addition to federal taxes, such as income tax, you may also have to register for state and local taxes.
After you’ve secured your EIN, registered for federal taxes, and received the necessary licenses, you’ve completed the essential steps to establish your sole proprietorship.
We suggest a few more tasks to help your small business stay aligned with rules and well-organized.
Open business bank accounts
To maintain clear financial records and separate your personal and business finances, it is essential to open a dedicated business bank account.
Having a business bank account offers several advantages, including:
- Simplified bookkeeping and record-keeping: Separating your personal and business finances allows for easier tracking of income and expenses.
- Facilitates accurate tax reporting: With a dedicated business bank account, you can easily identify and report business-related transactions on your tax returns.
- Demonstrates professionalism: Having a separate bank account adds credibility to your business and enhances your professional image when dealing with clients, suppliers, and financial institutions.
Get liability insurance
As a sole proprietor, you shoulder complete responsibility for any business debts or obligations, making insurance an essential part of your business strategy. It safeguards you from unexpected claims or events. Consider exploring the following:
- General business liability insurance: This coverage handles allegations of property damage, bodily injury, or personal harm tied to your business operations.
- Professional liability insurance: Particularly vital for service providers, this insurance defends against allegations of perceived negligence, errors, or lapses in your services.
Maintain business records
Maintaining detailed records is key to optimizing tax deductions and keeping your sole proprietorship’s finances in order. You should aim to record the following accurately:
- Assets and debts
Bookkeeping software, spreadsheets, or a structured system can help manage documents. This will be beneficial for tax submission and maintaining the overall financial well-being of your business.
Sole proprietorship vs. LLC
For certain small business owners and startups, forming a limited liability company (LLC) may be better than operating as a sole proprietorship. LLCs have some key advantages:
- Liability protection: LLCs legally separate your personal and business assets, which sole proprietorships do not.
- Credibility: The formal LLC structure appears more professional to customers.
- Growth potential: LLCs are well-suited if you aim to expand your business over time.
- Tax flexibility: LLCs allow you to choose how your business income is taxed.
However, LLCs also have some downsides:
- Complexity: LLCs require you to fill in articles of organization and draft an operating agreement and annual reporting. Sole proprietorships involve less paperwork.
- Cost: Forming and maintaining an LLC has higher upfront and ongoing costs than a sole proprietorship.
Useful resources to help start your sole proprietorship in Colorado
Do I need a business license to operate as a sole proprietor in Colorado?
While there is no general requirement for a business license, you may need specific licenses depending on your business activities and location. Check with the Colorado Department of Business and Professional Regulation and your local city and county governments for more information.
Can I use my name as the business name for my sole proprietorship?
You can use your name or choose a trade name (DBA) for your sole proprietorship. If you opt for a trade name, check its availability and file a Statement of Trade Name with the Colorado Secretary of State if desired.
Do I need an EIN for my sole proprietorship in Colorado?
Sole proprietors without employees can use their Social Security Number (SSN) for tax purposes. However, obtaining an Employer Identification Number (EIN) offers benefits such as business banking opportunities, establishing business credit, easing the hiring process, enhancing business privacy, and preparing for business growth.
How do I register for taxes as a sole proprietor in Colorado?
Registering for taxes as a sole proprietor in Colorado involves determining your specific tax obligations and registering accordingly. Use the MyBizColorado online portal to guide you through registration and ensure compliance with state and local tax requirements.
Should I consider forming an LLC instead of a sole proprietorship?
Forming an LLC protects personal liability, separating your assets from business liabilities. It also offers flexibility in terms of taxation.
Do I need a registered agent for my sole proprietorship in Colorado?
No, a registered agent is not required for sole proprietorships, though some choose to use one for privacy and legal advice. Registered agents are mandatory for LLCs.
Find out how to start a sole proprietorship
Click on your state below to get started.