How to Start a Sole Proprietorship in Montana
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Starting a sole proprietorship, you should take important steps in Montana. It is a straightforward process that doesn’t require any formal paperwork. You should take important steps to ensure your business is legally compliant and set up for success. This complete guide will walk you through each step of starting a sole proprietorship in Montana, from choosing a business name to obtaining the necessary licenses and permits.
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What is a sole proprietorship?
A sole proprietorship provides the most basic business structure – 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 other business entities like 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 personal 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 Montana sole proprietorship
Choose a business name
Choosing a business name is an important first step in starting your sole proprietorship. Your business name should be unique, memorable, and not already used by another Montana-registered company.
By default, sole proprietors must use their name for their business. If you plan to operate under a name other than your legal name, you’ll need to file a “Doing Business As” (DBA) or Assumed Business Name (ABN) registration.
Here are the steps to filing your DBA:
- Choose a business name: Aim for a catchy and explanatory name when considering options. Choosing a name that highlights your business’s uniqueness can help build a well-known brand.
- Check availability: Once you’ve thought of a few potential names, verifying their availability is key.
Helpful online tools include:
- The Business Search from the Montana Secretary of State, ensuring the name isn’t already taken in Montana.
- The Electronic Search System from the US Patent and Trademark Office protects against trademark overlaps.
- Check online availability: Look into the availability of your business name as a .com and across social media platforms. Securing consistent online names will help increase your brand’s presence and make it easier to discover online.
- Register the business name: Once you’ve confirmed the availability of your chosen name, you can register it as an assumed name. You need to register your DBA with the Montana Secretary of State. Complete the assumed business name form online and attach a filing fee. There is no way to file in person.
Obtain an (Employer Identification Number) EIN
Sole proprietors without staff can use their Social Security Number (SSN) for federal tax purposes rather than registering for an Employer Identification Number (EIN).
However, there are several advantages to proactively obtaining an EIN from the Internal Revenue Service (IRS) as a sole proprietor:
- Opens up business banking opportunities: An EIN facilitates opening dedicated business bank accounts, credit cards, and loans to keep finances separate from your funds.
- Helps establish business credit: Applying for credit under your new EIN rather than SSN allows you to build credit tied to your company’s financial profile.
- Eases hiring process: Obtaining an EIN is beneficial for adding employees in the future, as it distinguishes your business from your tax documents.
- Enhances business privacy: Your EIN replaces using your SSN on business paperwork, protecting your identity and personal information.
- Prepares for business growth: An established EIN can streamline transitions if you incorporate or change structure as your business grows.
You can apply for your EIN here.
Obtain Montana business licenses, permits, and zoning clearances
There is no general business license requirement for sole proprietors in Montana.
- Some businesses in Montana may require state-level licenses or registrations.
- The Small Business Development Center Network in Montana provides valuable information and resources on state licensing requirements.
- Montana’s Department of Labor and Industry website contains information on professional licenses, such as how to apply for and renew them.
- Local licenses and permits vary by city and county. Check with your specific municipality to determine if there are any local licensing or registration requirements for your sole proprietorship. A full list of counties and cities can be found in the Montana League of Cities and Towns Online Directory.
- If your business involves activities regulated at the federal level, you may need to obtain relevant federal permits or licenses. The U.S. Small Business Administration provides resources to help determine which federal permits or licenses you may need.
Register for taxes
As a sole proprietor in Montana, you must report your Montana business activities on your personal tax return Form 1040. Attach Schedule C to list income or losses from your Montana sole proprietorship.
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.
Access the most current versions of Form 1040, Schedule C, and Schedule SE here.
Additional state and local taxes
- The Montana Department of Revenue hosts the useful TransAction portal, which allows you to pay your taxes online.
- Common state taxes include sales tax and use tax. Depending on the nature of your business, you may be liable to pay additional business taxes.
Additional steps
Completing your EIN application, federal tax registration, and securing necessary licensing checks the core boxes for establishing your sole proprietorship. With the legal basics covered, it’s wise to take extra steps to set up your new business for ongoing success.
Open business bank accounts
Keeping your business and personal finances separated is key for accurate recordkeeping and protecting your assets. Think about opening:
- Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
- Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.
Get liability insurance
Sole proprietors carry unlimited liability for business obligations, so insurance is critical. Policies can shield against unexpected claims or events. Consider:
- General business liability insurance: Covers claims of property damage, bodily harm, or personal injury resulting from your operations.
- Professional liability insurance: For service providers, it protects against alleged negligence, errors, or omissions in delivering your services.
Maintain business records
Careful recordkeeping helps maximize tax deductions and organize your business 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.
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.
FAQs
Do I need to register my sole proprietorship in Montana?
No, you are not required to register a sole proprietorship with the state of Montana formally. You may need to file a DBA name if operating under a different business name.
What are the tax requirements for Montana sole proprietors?
You must report business income/losses on your personal income tax return. Depending on your business activities, you may need to register for state taxes like sales tax.
What is the difference between a DBA, a trade name, and an assumed business name?
There is no difference. They are all the same: they allow you to operate your business under a name that is not yours.
How do I legally change my sole proprietorship into a Montana LLC?
You would need to file articles of organization, create an operating agreement, obtain a new EIN, and update your business registrations. You will also need a registered agent and file yearly annual reports.
Is a sole proprietorship simpler for taxes than an LLC?
Yes, taxes for a sole proprietorship pass through to the owner’s personal return, avoiding separate business tax filings.
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