How to Start a Sole Proprietorship in Maryland

• 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.

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.

• 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.

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.

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.

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.

Careful recordkeeping helps maximize tax deductions and organize your sole proprietorship’s finances. Be sure to track:

• Income
• Expenses
• Assets/liabilities
• Inventory
• Receipts

Using bookkeeping software, spreadsheets, or an organized system makes staying on top of documentation easier for tax filing and general financial health.

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.