How to Start a Sole Proprietorship in Indiana
Starting a sole proprietorship in Indiana is a straightforward process that allows you to operate your business as an individual owner. This guide will take you through the steps to establish your new business in Indiana, including choosing a business name, obtaining necessary permits and licenses, registering for taxes, opening a business bank account, and more.
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What is a sole proprietorship?
A sole proprietorship is the simplest 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 Indiana sole proprietorship
Choose a business name
The first step is choosing a unique and memorable business name. You can use your own legal name or create a separate trade name for your business.
If you decide to use a trade name, also known as a “doing business as” (DBA) name, it’s important to ensure that it is not already used by another business in the state.
If you want to use a DBA name, follow these steps:
- Choose a business name: Select a name that reflects what you want your brand to be and is easy for customers to remember.
- Check availability: Once you have thought of your name, you have to confirm your proposed name is not already taken.
There are two key resources to check:
- Use the Indiana Secretary of State’s business entity search to confirm that a different Indiana business does not already use your name.
- The US Patent and Trademark Office has a national database you can search. Review trademarks to ensure your name does not infringe on any intellectual property.
- Check online availability: Perform a domain name search to ensure the corresponding website domain is available.
- Register the business name: You do not need to file their DBA name with the Secretary of State. File a Certificate of Assumed Business Name with the County Recorder of your business. You can find a full list of counties here. There is normally a filing fee associated with applying for a 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 immediately after completing the online application.
You can apply for your EIN here.
Obtain Indiana business licenses, permits, and zoning clearances
The State of Indiana does not require a general business license for sole proprietors.
- Specific occupations or industries may have licensing requirements. The online Business Owner’s Guide has a useful online tool that deals with many licensing issues.
- There is a dedicated licensing page on the Inbiz website.
- Visit the Indiana Professional Licensing Agency’s website to determine if your profession requires a state license.
- Certain businesses, such as those involved in agriculture, aviation, or firearms, may require federal licenses or permits. To determine if your business falls into these categories, visit the U.S. Small Business Administration’s Licenses and Permits page.
- Local cities and counties in Indiana often have specific licensing requirements for businesses operating in their jurisdiction. Contact your local city clerk to inquire about any local licenses or permits that may be necessary.
Register for taxes
As a sole proprietor, you report your business income and expenses on your personal tax return (Form 1040) using Schedule C (Profit or Loss from Business).
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.
Access the most current versions of Form 1040, Schedule C, and Schedule SE on the IRS website.
Additional state and local taxes
- In Indiana, sole proprietors may be subject to various state taxes depending on their business activities. The Indiana Department of Revenue (DOR) oversees tax registration and compliance. To determine your tax obligations and register your business, visit the DOR’s Business Tax page.
- Certain industries or activities may require additional state or local tax registrations. If you sell taxable goods or services, you may need to register for sales tax with the Indiana DOR.
Additional steps
Once you have obtained your EIN, registered for any federal taxes, and obtained the correct licenses, you have completed all the steps needed to start your sole proprietorship. Below we will outline some extra steps to stay compliant and organized as a small business.
Open business bank accounts
Separating your personal and business finances is essential for keeping accurate records and protecting your personal assets. Consider the following:
- Business bank account: Opening a bank account to manage your business finances separately will help you track income and expenses, simplify tax reporting, and can help establish credibility.
- Business credit card: A credit card can also help keep personal and business expenses separate. This will make it easier to track business-related expenses and build credit for your business which can be useful further down the road.
Get general liability insurance
Because sole proprietors have no liability protection for all debts and obligations of the business, they should consider taking out an insurance plan. A business liability insurance policy can offer protection against unforeseen events.
- General business liability insurance: This insurance covers property damage, bodily injury, and personal injury claims against your business.
- Professional liability insurance: Professional liability insurance protects you from claims of negligence or errors if you provide professional services, such as consulting or advising.
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:
- Earnings
- Costs
- Assets and debts
- Stock
- Invoices
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.
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.
FAQs
Is there a fee to register as a sole proprietor in Indiana?
No formal registration or fee is required to operate as a sole proprietor in Indiana.
Can I change my business name after registering as a sole proprietor?
Yes, you can change your business name at any time. You must update your records with the appropriate agencies and notify your customers and suppliers of the change.
Can I hire employees if I am a sole proprietor?
Yes, as a sole proprietor, you can hire employees. You must comply with federal and state employment laws, such as withholding taxes and providing workers’ compensation insurance.
Do I need a separate business bank account as a sole proprietor?
While not legally required, having a separate business bank account helps you manage your finances more efficiently and demonstrates the separation between personal and business funds.
Can I convert my sole proprietorship to an LLC in the future?
Yes, converting your sole proprietorship to an LLC is possible if you decide to change your business structure.
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