How to Start a Sole Proprietorship in Massachusetts

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 separate 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.

Depending on the nature of your business, you may need to obtain specific licenses, permits, or zoning clearances to operate legally in Massachusetts.

• There is no general business license requirement for sole proprietors. 
• Massachusetts has hundreds of additional professional and regulatory licenses. Your sole proprietorship will likely need additional licenses.

• You should check with your local city and county governments for any specific permits or licenses required at the local level. Some businesses may need to comply with building permits, health and safety regulations, or zoning laws.

Additional state and local taxes

• State taxes: In Massachusetts, sole proprietors must pay personal income tax on business profits. You must file a Massachusetts Resident Income Tax Return or Massachusetts Nonresident/Part-Year Resident Income Tax Return annually.
• Sales and use tax: If your sole proprietorship sells taxable goods or services in Massachusetts, you may be required to collect and remit sales tax to the Massachusetts Department of Revenue. You must register for a Sales and Use Tax Registration Certificate from the Department of Revenue.

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, including:

• 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.

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.

Keeping records is important for tax filing and managing your sole proprietorship’s financial affairs. You should make an effort to precisely track the following:

• Income
• Expenses
• Assets and liabilities
• Inventory
• Billing documents

Using bookkeeping software and spreadsheets or setting up a systematic method can help handle documents. Being as organized as possible will prove helpful when it’s time to file taxes, and it promotes the overall financial health of your business.

While a sole proprietorship might seem appealing due to its simplicity and few legal needs, it’s vital to consider possible downsides and look into other types of business structures, like an LLC.

Here are some things to think about when choosing between a sole proprietorship and an LLC:

• Protection from debt: One big plus of starting an LLC is its protection from debt. As a sole proprietor, you are responsible for any money owed or legal claims against your business, which could put your assets at risk. On the other hand, an LLC gives a clear divide between your personal and business assets, keeping your personal belongings safe from business debts.
• Looking professional: An LLC could make you look more professional in customers’ eyes. Starting an LLC shows more dedication to your business.
• Potential to grow: If you plan to make your business bigger or attract outside funding, an LLC gives you more room to grow than a sole proprietorship.
• Flexibility with taxes: One plus of a sole proprietorship is how simple it is when it comes to taxes. You usually report money made and money spent by your business on your personal tax return with a Schedule C. An LLC also offers flexibility with taxes, as it can be treated like a sole proprietorship, a general partnership, or a corporation for tax reasons.

It’s important to remember that starting an LLC involves more steps and legal needs, like filing Articles of Organization and paying filing fees.

• Massachusetts Secretary of Commonwealth website
• Massachusetts business search
• Massachusetts reserved name database
• Massachusetts trademark database
• US Patent and Trademark Office
• EIN Application 
• Massachusetts Business License, Permits, and Regulation
• Massachusetts professional licenses and permits.
• Division of Occupational Licensure
• Division of Professional Licensure
• Form 1040
• Schedule C
• Schedule SE