How to Start a Sole Proprietorship in Illinois
Starting a business as a sole proprietorship in Illinois can be an exciting and rewarding endeavor. Whether pursuing your passion or looking for financial independence, establishing a sole proprietorship is popular due to its simplicity and cost-effectiveness. This guide will walk you through the process of starting a sole proprietorship in Illinois. From choosing a business name to obtaining licenses and permits, we’ll cover all the essential information you need.
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 structures 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 personal 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 Illinois sole proprietorship
Choose a business name
The first step is choosing a business name. By default, sole proprietors must use their legal name as their business name. If you intend to do business under a different name, you must file an assumed business name or “Doing Business As” (DBA) in Illinois.
Here are the steps you need to take to register your DBA:
- Choose a business name: Think of some potential names that communicate what your company does. Aim for a name that is memorable, descriptive, and catchy. This can become a valuable marketing tool for you to attract new customers.
- Check availability: After brainstorming business names, you must verify the name is unique and available.
There are two essential resources to check:
- The Illinois Secretary of State offers a business search to search registered business entities in the state.
- The US Patent and Trademark Office lets you search their national trademark database. Review federal trademarks thoroughly to ensure your name does not infringe on any existing trademarks or intellectual property.
- Check online availability: It is important to ensure your business name is available online. Search to see if the .com domain for your business name is available. Securing the ideal domain will make your website and online presence seamless. Check that related social media handles across platforms like Facebook, Instagram, and Twitter are also free to claim. Matching usernames will further build your brand.
- Register the business name: You must file for permission to use an assumed name with the county clerk’s office where your primary business place is. To complete the DBA filing, you’ll typically need to provide the following information along with a filing fee.
- Business name
- Business address
- Your name and address
Certain countries, like Cook County, will allow you to register your DBA online. However, you need to check with your specific county. You can find your local county’s contact information from the Illinois Association of County Clerks and Recorders.
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 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 must 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 Illinois business licenses, permits, and zoning clearances
Depending on the nature of your business, you may need to obtain specific licenses, permits, and zoning clearances to operate legally in Illinois.
- Sole proprietors are not required to obtain a general business license.
- Visit the registrations, licenses, and permits page on the Illinois.gov website for more information on what licenses may apply to your business.
- The Illinois Department of Employment Security’s website has a section on licensed, certified, and registered occupations, and the Illinois Department of Financial and Professional Regulation provides detailed information about various professional licenses.
- Your local municipality may also have additional licensing requirements for sole proprietors; contact your local county clerk’s office for local information.
Register for taxes
As a sole proprietorship, your business taxes are filed alongside your personal tax return. You submit your Form 1040 personal income tax return each year and attach a Schedule C. A Schedule C summarizes your business’s income, profits, and losses from the past year.
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
- All new businesses in Illinois must register for taxes with the Illinois Department of Revenue. This includes registering for the Retailers’ Occupation Tax, Sales Tax, and other applicable taxes based on your business activities.
- You can register online through the MyTax Illinois website or by completing the form REG-1.
- Additional state and local taxes may be needed depending on your business activities and location.
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 separate business bank account offers several advantages:
- 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 general 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 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 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 Illinois
- Illinois Secretary of State Business Search
- US Patent and Trademark Office trademark search
- Illinois Association of County Clerks and Recorders
- EIN application
- Form 1040
- Schedule C
- Schedule SE
- MyTax Illinois website
- Illinois registrations, licenses, and permits
- Illinois Department of Employment Security licensed occupations
- Illinois Department of Financial and Professional Regulation licenses
Can I change my business name after registering it as an assumed name?
You can change your business name by filing an amendment with the county clerk’s office. Be sure to follow the specific procedures outlined by your county.
Is liability insurance required for sole proprietors in Illinois?
Liability insurance is not legally required for sole proprietors in Illinois. However, protecting your assets from potential business-related risks is highly recommended.
Can a sole proprietor hire employees in Illinois?
Yes, a sole proprietor can hire employees in Illinois. Additional obligations, such as payroll taxes and employment regulations, will apply. Consult the IRS and the Illinois Department of Employment Security for guidance on hiring and managing employees.
Can a sole proprietor convert to an LLC in the future?
Yes, a sole proprietor can convert their business to an LLC anytime.
Does my sole proprietorship need a registered agent?
No, sole proprietorships do not need registered agents; registered agents are mandatory for Illinois LLCs.
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