How to Start a Sole Proprietorship in Minnesota
Launching a sole proprietorship is a simple and popular way to start your business in Minnesota. As a sole proprietor, you retain complete control and decision-making power over your enterprise. This straightforward business structure offers flexibility for entrepreneurs looking to get started quickly. This guide will walk you through all the key steps in starting a sole proprietorship in Minnesota, from choosing your business name to obtaining licenses and registering for taxes. We’ll also provide useful tips and resources to set up for success.
What is a sole proprietorship?
A sole proprietorship provides the most basic type of business – it is owned and managed entirely by one person responsible for its debts and liabilities. The simplicity of set-up makes sole proprietorships a go-to choice for many new business owners going solo. Unlike Limited Liability Companies (LLCs) and corporations, there is no legal distinction between a sole proprietor’s personal and business assets.
While this simplicity can be advantageous, sole proprietorships also have drawbacks. Most notably, they offer entrepreneurs little protection for the owner’s assets. Weighing these protections and limitations is important in deciding if a sole proprietorship is the right structure for your business.
A step-by-step guide to starting your Minnesota sole proprietorship
Choose a business name
When operating as a sole proprietor in Minnesota, you have the option to use your legal name or a trade name, also known as an “assumed name” or “doing business as” (DBA), for your business. If you choose to use a trade name, it should not be the same as any other registered business in the state.
Here are the steps for filing your new DBA name:
- Choose a business name: Aim to choose a descriptive name that reflects what your business does. A catchy name that embodies your business’s main idea can bolster brand awareness.
- Check availability: Once you have considered a few names, it is important to check their availability.
Use these online tools to help:
- Check online availability: Ensure your business name is available as a .com domain and on primary social media platforms. Securing matching domains and social handles enhances online visibility, making your company easily discoverable.
- Register the business name: File a Certificate of Assumed Name with the Minnesota Secretary of State to register your trade name. You can also file online if you have opened an account with the Secretary of State. The filing fee is slightly cheaper if you file in person.
Obtain an (Employer Identification Number) EIN
As a sole proprietor, you may not be required to obtain an EIN, especially if you have no employees. In such cases, you can use your Social Security Number (SSN) as your tax ID number. However, obtaining an EIN can provide privacy benefits and help streamline certain business operations.
- Opens up business banking opportunities: Obtaining an EIN enables opening dedicated business bank accounts, credit cards, and financing.
- Helps establish business credit: An EIN allows building business credit rather than relying solely on personal credit history.
- Eases the hiring process: Getting an EIN distinguishes the business finances and tax documentation from the owner’s finances.
- Enhances business privacy: Using an EIN instead of an SSN on business documents enhances privacy protections.
- Prepares for business growth: An established EIN can simplify future transitions to more structured business entities.
You can apply for your EIN on the Internal Revenue Services (IRS) website.
Obtain Minnesota business licenses, permits, and zoning clearances
Minnesota does not have a general business license requirement for sole proprietors.
Your first port of call to determine if your business requires a license should be the Minnesota ELicensing website, which lets you browse licenses by topic, agency, or even A to Z.
The Minnesota Department of Employment and Economic Development and the Minnesota Department of Labor and Industry provide business and professional license information.
You may also need to obtain licenses or permits at the local level. Different cities and counties in Minnesota have their own regulations and requirements for operating a business. Check with your local city hall or county offices to determine whether you need local licenses or permits.
If your business engages in activities regulated by federal agencies, such as alcohol, firearms, or aviation services, you may need specific federal licenses. Visit the U.S. Small Business Administration’s website for more information.
Register for taxes
As a sole proprietor in Minnesota, you must report all business income and expenses on your tax return each year. When you file your annual Form 1040 personal income tax return, include Schedule C and Schedule SE along with your Form 1040.
Use Schedule C to provide the details on your sole proprietorship’s income, profits, and losses for the tax year. 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
Businesses in Minnesota must obtain a Tax Identification Number from the Minnesota Department of Revenue if they file returns for income tax purposes, have employees, make taxable sales and thus sales tax, or owe use tax on their purchases.
Most businesses will need a Minnesota Tax ID Number; however, a sole proprietorship with no tax obligations does not.
It’s also important to check if your local city or county has additional taxes or tax registration requirements for businesses operating within their jurisdiction.
After you’ve secured your EIN, registered for federal taxes, and received the necessary licenses, you’ve completed the essential steps to establish your sole proprietorship.
We suggest a few more tasks to help your small business stay aligned with rules and well-organized.
Open business bank accounts
Drawing a line between your personal and business finances is crucial for maintaining accurate financial records and preserving your personal assets. To set up business accounts, adhere to the following steps:
- Business bank account: Establishing a separate account can simplify the tracking of income and costs, simplify tax filing, and lend credibility to your operation.
- Business credit card: Having a business credit card not only helps segregate personal and business expenses but also aids in monitoring business-related costs and building your business’s credit, which can prove beneficial in the future.
Get liability insurance
As a sole proprietor, you bear the full brunt of any business liabilities, making insurance a crucial aspect of your business plan. This can protect you from unforeseen claims or incidents. We recommend looking into the following:
- General business liability insurance: This policy covers accusations of property damage, bodily harm, or personal injury linked to your business activities.
- Professional liability insurance: If you offer services, this insurance is critical as it shields you from claims of supposed negligence, mistakes, or oversights in your service provision.
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:
- Assets and debts
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.
Do I need to file any legal documents to start a sole proprietorship in Minnesota?
No, you need not file any legal documents to start a sole proprietorship in Minnesota. You must file a Certificate of Assumed Name if you use a trade name for your business.
Do I need an EIN for my sole proprietorship if I don’t have any employees?
You can use your Social Security number for tax reporting purposes if you do not have employees. We recommend getting an EIN. It can provide additional benefits like privacy and reduce identity theft risk.
Are there any additional taxes or licenses I need to consider for my sole proprietorship in Minnesota?
Depending on your business activities, you may need to register for state sales and use tax or obtain specific professional licenses. Check with your local city or county for additional taxes or licensing requirements.
Should I consider forming an LLC instead of a sole proprietorship?
While a sole proprietorship is the simplest form of business organization, forming an LLC can provide personal liability protection and potential tax benefits.
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