How to Start a Sole Proprietorship in Delaware
Are you considering starting a business in Delaware? A sole proprietorship might be the perfect choice for you. This business entity offers simplicity and flexibility, making it an attractive option for many entrepreneurs and startups. This guide will walk you through the process of starting a sole proprietorship in the state of Delaware. From choosing a business name to obtaining licenses and permits, we’ve got you covered.
What is a sole proprietorship?
A sole proprietorship is the simplest form of business entity. It is owned and operated by a single individual responsible for the business’s finances and debts. They are easy to set up and, for this reason, are popular amongst solo entrepreneurs and business owners. Unlike other business types like Limited Liability Companies (LLCs) or corporations, there is no legal separation between the business and the owner.
While a sole proprietorship offers simplicity and flexibility but has some drawbacks. The main disadvantage is the lack of asset protection. As a sole proprietor, your assets, like your car, home, and savings, are at risk if your business runs up debts or has any legal obligations.
A step-by-step guide to starting your Delaware sole proprietorship
Choose a business name
A “doing business as” (DBA) allows you to conduct business under a name other than your personal name. Sole proprietors often choose to use a DBA name as it is considered more professional than a business that uses its owner’s legal name. DBAs are often referred to as fictitious names or trade names.
Here are the steps to filing your new DBA:
- Choose a business name: Think of potential names for your business. These should be catchy and descriptive. A good name serves as an excellent marketing tool.
- Check availability: Trade names in Delaware must be unique. Visit the Delaware Division of Corporations and conduct an entity name search to check that your proposed name is available.
We recommend searching the US Patent and Trademark Office’s trademark database to double-check that you aren’t infringing on another company’s intellectual property.
- Check online availability: Check that your proposed names’ website’s domain and social media handles are available.
- Register the business name: You must register your new trade name with the prothonotary for the country where your business is based.
Obtain an (Employer Identification Number) EIN
Sole proprietors without employees don’t need to register for a federal tax ID number. They can use their Social Security Number (SSN) for tax purposes.
However, we recommend obtaining an EIN from the Internal Revenue Service (IRS) for several reasons:
- Opens up business banking opportunities: An EIN is often required to open a business bank account. This can help separate personal and business finances.
- Helps establish business credit: With an EIN, you can apply for business credit cards and loans separate from your personal credit. This can help you build credit for your business, which may be useful for future financial opportunities.
- Eases hiring process: If you plan on hiring employees in the future, you must have an EIN. It’s required to report taxes and other documents to the IRS and set up payroll because it helps distinguish employees from employers.
- Enhances business privacy: An EIN can also replace your social security number in business paperwork, protecting you from identity theft and adding an extra layer of privacy.
- Prepares for business growth: Even though a sole proprietorship does not legally require an EIN, having one can simplify the transition if you decide to incorporate or restructure your business.
You can apply for your EIN here.
Obtain Delaware business licenses, permits, and zoning clearances
Depending on the nature of your business, you may need to obtain various licenses, permits, and zoning clearances to operate legally in Delaware. The specific license requirements will vary based on your industry and location.
- In Delaware, every business, including sole proprietorships, must sign up for a general business license with the state authorities.
- This license remains valid for up to a year and concludes on December 31, annually, no matter when you originally registered.
- The fee for this general license is $75. The fee will be adjusted if you get your license partway through the year.
- You can apply for this permit when setting up your business on the One Stop Business portal.
- You may be subject to getting extra licenses depending on your industry. For a full list of state-level regulated industries, visit this link.
- You may need additional licenses and permits based on your municipality. Contact your municipality for more information; visit this link for contract details.
Register for taxes
If you are a sole proprietor, your business income is reported on your tax return (Form 1040). You must file Schedule C to report your business income and expenses.
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
Depending on your business, you may be subject to additional state and local taxes in Delaware.
All businesses in Delaware, including sole proprietorships, must register with the Division of Revenue and pay state taxes.
You must obtain a state tax identification number and file appropriate tax returns based on your business activities. Visit the Delaware Division of Revenue website for more information on state tax obligations.
For example, if you sell goods or services subject to sales tax, you must register for a sales tax permit and collect tax from your customers.
Completing your EIN application, federal tax registration, and securing necessary licensing checks the core boxes for establishing your sole proprietorship. With the legal basics covered, it’s wise to take extra steps to set up your new business for ongoing success.
Below are some recommended best practices for remaining compliant and keeping your sole proprietorship running smoothly as it grows.
Open business bank accounts
Keeping your business and personal finances separated is key for accurate recordkeeping and protecting your assets. Think about the opening:
- Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
- Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.
Get liability insurance
Sole proprietors carry unlimited liability for business obligations, so business insurance is critical. Policies can shield against unexpected claims or events. Consider:
- General business liability insurance: Covers claims of property damage, bodily harm, or personal injury resulting from your operations.
- Professional liability insurance: For service providers, it protects against alleged negligence, errors, or omissions in delivering 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 accurately record the following:
- 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 an 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 file a certificate of formation, draft an operating agreement and file annual reports. Sole proprietorships involve less paperwork.
- Cost: Forming and maintaining an LLC has higher upfront and ongoing costs than a sole proprietorship.
Tips when deciding:
- Consult a tax professional to determine the better structure for your business needs.
- Compare liability protection needs against a desire for simplicity.
Useful resources to help start your sole proprietorship in Delaware
- Delaware Division of Corporations
- Delaware business name search
- US Patent and Trademark Office
- List of Delaware municipalities
- Registration of Trade Name Certificate
- Form 1040
- Schedule C
- Schedule SE
- Delaware Division of Revenue
- Delaware Secretary of State
- Delaware One Stop Business Licensing and Registration Service
- Delaware Department of Business and Professional Regulation
Do I need a business license to operate a sole proprietorship in Delaware?
Yes, all businesses in Delaware, including sole proprietorships, must obtain a general business license from the Division of Revenue. Additional licenses or permits may be required depending on your industry and location.
Does my sole proprietorship need a registered agent?
You don’t need a registered agent legally if you’re running a sole proprietorship in Delaware. Still, having one can give you extra privacy and reassurance. If you own an LLC, however, having a registered agent is compulsory.
If I start a sole proprietorship, can I hire employees?
Yes, sole proprietors in Delaware have the option to hire employees. You must comply with employment laws, including tax withholding and reporting requirements.
Can I convert my sole proprietorship into a Delaware LLC in the future?
Yes, converting your sole proprietorship into an LLC is possible if you decide to change your business structure. However, this process involves filing formation documents with the Delaware Division of Corporations and other necessary steps.
What are the advantages of choosing a sole proprietorship in Delaware?
Some advantages of a sole proprietorship include simplicity of formation, full control over the business, and pass-through taxation. It’s a flexible option for small businesses and requires fewer formalities than other business structures.
What are the disadvantages of a sole proprietorship in Delaware?
The main disadvantage is unlimited personal liability. As the business owner, you are personally responsible for any debts or legal issues arising during your business.
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