How to Start a Sole Proprietorship in Maryland
Launching a sole proprietorship in Maryland doesn’t have to be a complex process. With upfront planning and preparation, you can establish your new business smoothly and efficiently. This guide will provide the key steps and information you need to get your sole proprietorship up and running in Maryland. We’ll walk you through important procedures like choosing a business name, obtaining licenses, setting up your accounting, understanding tax obligations, and complying with state regulations. With the right groundwork, you can successfully set up your sole proprietorship from start to finish.
What is a sole proprietorship?
A sole proprietorship is one of the most simple forms 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 startups and solo entrepreneurs. Unlike other business structures such as Limited Liability Companies (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 Maryland sole proprietorship
Choose a business name
Sole proprietors need to operate under their legal name. You must file a DBA (Doing Business As) or trade name to operate under a different business name.
Filing a trade name application allows you to use a different name for your business, making it more professional and trustworthy in the eyes of your clients.
Here are the steps to filing your DBA:
- Choose a business name: Picking the perfect name for your sole proprietorship is an important first step. Come up with a few catchy, memorable options that give customers a sense of your business. A name that instantly communicates your company’s offerings can be useful for attracting new clients.
- 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:
- To check that your chosen business name is available, conduct a search using the Maryland Department of Assessments and Taxation website. This search will help determine if any other Maryland entity has a similar name.
- The US Patent and Trademark Office lets you search the national trademark database. Review trademarks to ensure your name does not infringe on any intellectual property.
- Check online availability: Make sure your business name is available as a .com domain for your website. Check related social media handles can be claimed. Locking down matching domains and usernames creates unity between your business name and online presence. Securing aligned domains and handles is key for a cohesive online brand.
- Register the business name: Fill in a trade name application form by hand or on the Maryland Business Express website. The form will ask for the following:
- Trade name
- Business address
- Legal name
- Home residence
Once you have completed the trade name application, submit it to the Maryland Department of Assessments and Taxation. You can apply by mail, in person, or online. There is a small filing fee for applying and an additional fee for expedited filing.
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 federal tax ID number.
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 Maryland business licenses, permits, and zoning clearances
- There is no general business license requirement for sole proprietors in Maryland.
- Most sole proprietorships in the state of Maryland need at least one business license to operate legally. These licenses tend to be industry or profession-specific.
- To determine the licenses and permits required for your sole proprietorship, visit the Maryland Licensing Onestop Portal. This online resource provides information on professional, organizational, and personal licenses, permits, certificates, and applications.
- Check with your local government to determine whether specific licenses or permits are needed to operate your business. Contact the Clerk of the Court in the municipality where your business is located for guidance on local regulations and permits.
- Certain industries, like alcohol and aviation, are regulated at the federal level. You must apply for licenses from the relevant federal agencies to operate in these sectors. The Small Business Administration website provides helpful links and details on obtaining permits from federal regulators.
Register for taxes
Sole proprietors must report their business income and expenses on their personal tax returns. You may need to file Schedule C with your Form 1040. For more information and the necessary forms, visit the IRS website.
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
- Sole proprietorships aren’t separate legal entities so you still must follow state and local licensing rules and tax obligations. You’ll need an SDAT identification number to open a business bank account. This can be obtained through Maryland Business Express.
- Depending on your specific business activities, you may be subject to additional state and local business taxes. It’s essential to research and understand your tax obligations fully. For guidance and to register for taxes, visit the Maryland Comptroller of Treasury website.
- Depending on your sales and purchases, you may be required to collect and remit sales tax or pay use tax.
- File taxes using Form 502 just like an individual. Your net business profit/loss is combined with other income and taxed at individual rates.
- Make quarterly estimated Maryland tax payments using Form PV since income taxes aren’t withheld from sole proprietorships.
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 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 financial protection.
- General business liability insurance: This insurance covers property damage, bodily injury, and personal injury claims against your business.
- Professional liability insurance: Professional liability insurance can protect you from claims of negligence or errors if you provide professional services, such as consulting or advising.
Maintain business records
Careful recordkeeping helps maximize tax deductions and organize your sole proprietorship’s finances. Be sure to track:
Using bookkeeping software, spreadsheets, or an organized system makes staying on top of documentation easier for tax filing and general financial health.
Sole proprietorship vs. LLC
For some businesses, forming an LLC may better serve long-term goals than a sole proprietorship. LLCs offer advantages like:
- Liability protection: Your personal and business assets are legally distinct with an LLC structure. Your business is a legal entity that files taxes separately from the business owner.
- Credibility: The formal LLC designation can boost your professional image with customers.
- Growth potential: LLCs are well-suited if you aim to expand your current operations eventually.
- Tax flexibility: LLCs permit you to select how your business income is taxed.
However, LLCs also come with tradeoffs to weigh:
- Complexity: LLCs require drafting an operating agreement and annual reporting obligations. Sole proprietorships involve less paperwork.
- Cost: Forming and maintaining an LLC has higher upfront fees and ongoing costs.
- Consult a tax advisor to determine the ideal structure for your goals.
- Compare liability protection needs against the desire for simplicity.
Do I need a business license to start a sole proprietorship in Maryland?
You may need profession-specific licenses, but Maryland has no general business license requirement for sole proprietors. Check state and local regulations for your industry.
What is the cost to register my business name in Maryland?
There is a $25 filing fee to register your business name or DBA in Maryland, with an additional $50 expedited service fee if you want faster processing.
How do I obtain an EIN for my Maryland sole proprietorship?
You can easily get an EIN for free through the IRS website by completing a short online application that provides the EIN instantly.
What taxes will I need to pay as a sole proprietor in Maryland?
You must report your business income and expenses on your personal tax return. Depending on your business activities, you may owe additional taxes, like sales tax.
Is a sole proprietorship or LLC better for liability protection?
An LLC protects liability by separating your personal and business assets, while sole proprietors have unlimited liability.
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