How to Start a Sole Proprietorship in Maine
Starting a sole proprietorship in Maine is a straightforward process that allows you to operate your own business as an individual. This guide will take you through the steps to establish your sole proprietorship in Maine.
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 Maine sole proprietorship
Choose a business name
The first step in starting your new business is to think of a name. While you can use your legal name as your business name, many individuals prefer to create a distinct name for their business.
If you want to operate under a different name, you should register an assumed name, also known as a “Doing Business As” (DBA) in Maine.
Here are the steps to filing your DBA:
- Choose a business name: When choosing a name, think of options that communicate what your company does. An easy-to-remember and descriptive name can be a valuable marketing asset that attracts new customers.
- Check availability: Once you have chosen your name, you have to check that the name is unique.
There are two key resources to check:
- Check online availability: Confirm that your chosen name can be secured as a .com domain for your company website. Check the corresponding social media usernames are up for grabs too. Getting hold of identical domains and usernames fosters consistency between your business name and its digital identity, enhancing your brand and making it easier to discover on the internet.
- Register the business name: To register your DBA name, you must file the Assumed Business Name registration with the city or town clerk where you plan to do business. Contact your city or town clerk to get hold of the appropriate forms.
There is no state-level DBA registration required for sole proprietors.
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’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 Maine 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 Maine.
- The state does not require sole proprietors to obtain a general business license.
- Use the online Business Licensing Assistant the Maine Department of Economic & Community Development provides to determine the licenses and permits you need.
- This service offers free information about doing business in Maine and provides a list of licenses, permits, and qualifications specific to your business type.
- Sometimes, you may also need to consider local regulations, building permits, and zoning laws. Contact your local government to inquire about additional requirements or restrictions for your business location.
Register for taxes
As a sole proprietor, the method for filing your business taxes is the same as that of your tax return.
Each year, when you submit your personal income form, Form 1040, it should be accompanied by a Schedule C. This schedule itemizes your business’s revenue and any profits or losses.
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
- If your business involves selling goods or certain services, you may need to register with the Maine Revenue Service to collect and remit sales tax. Use tax may also apply if you purchase taxable items for your business from out-of-state vendors.
- You can utilize the Maine Revenue Service’s Maine Tax Portal to register for taxes. This online platform allows you to register your business, file tax returns, and make payments conveniently.
- It is important to note that additional state and local taxes may apply depending on your specific business activities. Research and identify any industry-specific taxes or fees that may apply to your sole proprietorship.
After securing your EIN, signing up for federal taxes, and getting the necessary licenses, you’ve crossed off all the big tasks required to launch your sole proprietorship.
Next, we’ll share some additional steps to help keep your small business aligned with rules and organized.
Open business bank accounts
Keeping your assets safe and creating segregation with your business finances is vital. Opening a dedicated business bank account will help you move towards this:
Setting up a business bank account comes with a host of benefits, like:
- Simplified bookkeeping and record-keeping: When your personal and business finances don’t mix, keeping track of what you earn and spend is much simpler.
- Facilitates accurate tax reporting: If you have a bank account just for your business, spotting and reporting business transactions on your tax filings becomes much easier.
- Demonstrates professionalism: A business-only bank account gives your business a professional look and feel, boosting your credibility with customers, suppliers, and banks.
Get general liability insurance
Being a sole proprietor means that you alone are responsible for any business debts, which makes insurance a key piece of your business strategy. This can help guard you against unexpected claims or incidents. Here’s what we suggest you consider:
- General business liability insurance: This policy takes care of claims related to damage to property, physical injury, or personal harm that might be connected to your business.
- Professional liability insurance: This type of insurance is vital if your business provides services. It helps protect you from alleged supposed negligence, errors, or oversights in your services.
Maintain business records
Keeping records is essential for maximizing tax deductions and organizing your sole proprietorship’s financial matters. Ensure you document the following:
- Assets and liabilities
Utilizing accounting software, spreadsheets, or setting up an organized method can simplify the task of paperwork management.
Sole proprietorship vs. LLC
While a sole proprietorship may seem attractive due to its simplicity and minimal legal requirements, it is important to consider the potential downsides and explore alternative business structures, such as an LLC.
Here are some factors to consider when deciding between a sole proprietorship and an LLC:
- Liability protection: One of the significant advantages of forming an LLC is its limited liability protection. Sole proprietors are liable for any debts or legal claims against your business, which means your personal assets are at risk. In contrast, an LLC provides a legal separation between your personal and business assets, shielding your assets from business liabilities.
- Credibility: An LLC may enhance your credibility in the eyes of clients, partners, and potential investors. Forming an LLC demonstrates more professionalism and commitment to your business.
- Growth potential: If you plan to expand your business or attract external funding, an LLC offers more flexibility and growth potential than a sole proprietorship.
- Tax flexibility: One of the advantages of a sole proprietorship is its simplicity in taxation. You normally report business income and expenses on your personal tax return through a Schedule C. On the other hand, an LLC also offers tax flexibility, as it can be treated as a sole proprietorship, a general partnership, or a corporation for tax purposes.
It is important to note that forming an LLC involves additional steps and legal requirements, such as filing Articles of Organization and paying filing fees.
Useful resources to help start your sole proprietorship in Maine
Can I operate a sole proprietorship under a trade name in Maine?
Yes, you can operate a sole proprietorship under a different name known as a DBA or trade name. While it is not required to register your DBA name with the state of Maine, you must register it with the municipal clerk of the county where your business operates.
Do I need a registered agent?
No, sole proprietors do not need registered agents, however, all Maine LLCs need one.
Are there any specific taxes I need to be aware of as a sole proprietor in Maine?
As a Maine sole proprietor, you must report and pay income tax on your business income. You may be required to collect and remit sales and use tax amongst other business taxes depending on the type of business you operate.
What is the difference between a single-member LLC and a sole proprietorship?
A single-member LLC and a sole proprietorship are separate legal entities. A sole proprietorship considers the owner and business one entity, while a single-member LLC provides legal and tax separation between the owner and the business.
Can I convert my sole proprietorship to an LLC in the future?
Yes, you can convert your sole proprietorship to an LLC if desired. Forming an LLC provides personal liability protection and other benefits.
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