How to Start a Sole Proprietorship in New Mexico

Sole proprietors without employees don’t need to register for a federal tax ID number. They can use their Social Security Number (SSN) for tax purposes.

However, we recommend obtaining an EIN from the Internal Revenue Service (IRS) for several reasons:

• Opens up business banking opportunities: An EIN is often required to open a business bank account. This can help separate personal and business finances.
• Helps establish business credit: With an EIN, you can apply for business credit cards and loans separate from your credit. This can help you build credit for your business, which may be useful for future financial opportunities.
• Eases hiring process: If you plan on hiring employees in the future, you must have an EIN. It’s required to report taxes and other documents to the IRS and set up payroll because it helps distinguish employees from employers.
• Enhances business privacy: An EIN can also replace your social security number in business paperwork, protecting you from identity theft and adding an extra layer of privacy.
• Prepares for business growth: Even though a sole proprietorship does not legally require an EIN, having one can simplify the transition if you decide to incorporate or restructure your business.

• New Mexico does not require sole proprietors to obtain a general business license.
• New Mexico has various state-level licenses and permits for different professions and industries. The New Mexico Regulation and Licensing Department can provide information and resources on state licensing requirements based on your business activities.
• Many licensing requirements in New Mexico are determined at the local level. Contact your local government to inquire about any local licenses you may need.
• Certain businesses may require federal licenses. Identify the agencies that oversee your industry and determine if any federal licenses are necessary.
• Visit the U.S. Small Business Administration’s website for more federal permits and license information.

Additional state and local taxes

• New Mexico has its own business tax requirements. The New Mexico Taxation and Revenue Department provides resources and information on state tax obligations for businesses.
• New Mexico imposes a gross receipts tax as opposed to a sales tax. If your business sells goods or services, you may need to collect and remit gross receipts tax to the state.

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 company 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 company 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 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 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 filing articles of organization and annual reporting obligations. Sole proprietorships involve less paperwork.
• Cost: Forming and maintaining an LLC has higher upfront fees and ongoing costs.