How to Start a Sole Proprietorship in New Jersey
Starting a sole proprietorship in New Jersey is a relatively simple process that requires no formal setup or fees. Some specific steps and considerations can help ensure a smooth and successful start to your venture. We will walk you through each step, from choosing a business name to obtaining the necessary licenses and permits.
What is a sole proprietorship?
A sole proprietorship is the simplest type 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 entrepreneurs. Unlike other business structures like 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 New Jersey 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 is a useful marketing tool 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:
- Complete a business name search using the New Jersey Division of Revenue’s Business Formation and Registration website. This allows you to check if another business is using your desired name.
- Search the USPTO database to ensure your name does not infringe on trademarks.
- 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: Complete a Trade Name Certificate form and submit it to the County Clerk’s office where your business is located with a filing fee.
Your county’s contact information is on the Constitutional Officers Association of New Jersey website.
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 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.
Apply for an EIN through the Internal Revenue Service (IRS) website. The process is free, and you receive your EIN immediately upon completing the online application.
You can apply for your EIN here.
Obtain New Jersey business licenses, permits, and zoning clearances
There is no general business license requirement for sole proprietors in New Jersey.
- New Jersey has specific licensing requirements for certain professional and industry-specific businesses. The NJ License and Certification Guide and the NJ business portal’s Licenses and Permits page are valuable resources for finding the necessary information.
- Municipalities in New Jersey may have their own licensing requirements and permits that your sole proprietorship must comply with.
- Certain industries and activities require federal licenses or permits. Determining if your business falls into any of these categories is crucial. You can consult the U.S. Small Business Administration website or contact relevant federal agencies for guidance.
Register for taxes
As a sole proprietor in New Jersey, you report your business income and expenses on your personal tax return, Form 1040. When you file your personal income tax, attach Schedule C to report details on your sole proprietorship’s income, profits, and losses for the year.
In addition to federal income taxes, you must pay self-employment tax, which includes Social Security and Medicare taxes, since you are self-employed. You can pay self-employment tax using Schedule SE.
Additional state and local taxes
- Sole proprietors are not required to file a separate business income tax return in New Jersey.
- Any net profit from the sole proprietorship will be included as personal income when filing annual New Jersey income taxes.
- Register your business with the state by completing the NJ-REG form in the Business Registration Packet or through online registration. This will ensure that your business complies with New Jersey state tax requirements.
- Determine the applicable taxes for your sole proprietorship. You may be subject to New Jersey’s use and sales tax if your business sells goods or products within the state. Check with the New Jersey Department of Treasury website for detailed information on sales and use taxes, employer withholding taxes, and other business taxes.
- In addition to federal and state taxes, local jurisdictions may impose additional taxes. For example, certain counties or municipalities in New Jersey may require local taxes or fees for specific business activities.
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 offers financial protection against unforeseen events.
- General business liability insurance: This insurance covers property damage, bodily injury, and personal injury claims against your business.
- Professional liability insurance: Professional liability insurance will protect you from claims of negligence or errors if you provide professional services, such as consulting or advising.
Maintain business records
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:
- Assets and liabilities
- 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.
Sole proprietorship vs. LLC
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 own 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.
Do I need to register my sole proprietorship with the state of New Jersey?
No, no formal registration process exists for sole proprietorships in New Jersey. However, you may need to register your trade name with the local county clerk if you operate under a DBA.
Can I hire employees as a sole proprietor in New Jersey?
Yes, sole proprietors can hire employees. If you have employees, you must comply with federal and state employment tax requirements and provide appropriate withholdings and reporting.
Do I need an EIN for my sole proprietorship in New Jersey?
Sole proprietors without employees can use their Social Security Number (SSN) for tax purposes. However, obtaining an Employer Identification Number (EIN) can provide additional privacy and security.
Are there any ongoing reporting or renewal requirements for sole proprietors in New Jersey?
Sole proprietorships in New Jersey do not have specific reporting or renewal requirements. However, it is essential to maintain accurate records, comply with tax obligations, and renew any necessary licenses or permits on time.
Can I convert my sole proprietorship to an LLC in the future?
Yes, you can convert your sole proprietorship to an LLC if you decide to pursue additional liability protection and other benefits offered by an LLC. Consult with a small business attorney or financial advisor to explore this option further.
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