How to Start a Sole Proprietorship in New Mexico
The process of starting a sole proprietorship in New Mexico is relatively straightforward. A sole proprietorship allows individuals to establish and manage their own businesses. This complete guide will walk you through the steps to starting your sole proprietorship in New Mexico, providing valuable information on choosing a business name, obtaining necessary licenses and permits, registering for taxes, and more.
What is a sole proprietorship?
A sole proprietorship is the most straightforward business entity of all business structures. It is owned and operated by a single individual responsible for the business’s finances and debts. They are easy to set up and, for this reason, are popular amongst solo entrepreneurs and startups. In contrast to business structures such as Limited Liability Companies (LLCs) or corporations, the business and the owner are not legally separate.
While a sole proprietorship offers simplicity and flexibility but has some drawbacks. The main disadvantage is the lack of asset protection. As a sole proprietor, your assets, like your car, home, and savings, are at risk if your business runs up debts or has any legal obligations.
A step-by-step guide to starting your New Mexico sole proprietorship
Choose a business name
Choosing a business name is an important first step in starting your sole proprietorship in New Mexico. While you can use your legal name, many individuals prefer a trade name or a “Doing Business As” (DBA) name for their business.
A DBA name allows you to operate your business under a name different from yours, which can add professionalism and credibility to your brand.
Here is how you can choose and register a business name for your sole proprietorship in New Mexico:
- Choose a business name: Select a unique, memorable name that accurately represents your business. Consider brainstorming ideas and conducting market research to ensure the name aligns with your target audience and industry.
- Check availability: Before finalizing your business name, it is essential to check its availability.
There are two key resources to check:
- Search the New Mexico Secretary of State‘s business name database to ensure another state business does not already use the name.
- Search the US Patent and Trademark Office’s Trademark Electronic Search System to avoid potential trademark conflicts.
- Check online availability: In today’s digital age, online presence is crucial for businesses. Check the availability of your chosen business name as a domain name and on social media platforms. Registering a domain name that aligns with your business name can help establish your online presence and make it easier for customers to find you.
- Register the business name: While New Mexico does not require sole proprietors to register their DBA names with the state, you may still choose to do so for added protection and credibility. To register your new name, file a certificate of assumed name with the county clerk where you conduct business.
Obtain an (Employer Identification Number) EIN
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.
You can apply for your EIN here.
Obtain New Mexico business licenses, permits, and zoning clearances
- 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.
Register for taxes
In New Mexico, being a sole proprietor means you must report your business earnings and costs on your individual tax return. You must include a Schedule C, which details your sole proprietorship’s profit or loss, along with your Form 1040.
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
- 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.
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 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.
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 can protect you from claims of negligence or errors if you provide professional services, such as consulting or advising.
Maintain business records
Careful recordkeeping helps maximize tax deductions and organize your sole proprietorship’s finances. Be sure to track:
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 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.
- Consult a tax advisor to determine the ideal structure for your goals.
- Compare liability protection needs against the desire for simplicity.
Do I need a registered agent for my sole proprietorship in New Mexico?
No, sole proprietors do not need a registered agent. It is mandated that all New Mexico LLCs have registered agents.
What taxes do sole proprietors in New Mexico have to pay?
Sole proprietors in New Mexico must report their business income and expenses on their personal tax returns.
What is the main difference between a sole proprietorship and an LLC?
A sole proprietorship is a simple type of business where the business and the owner are considered the same legal entity. An LLC protects personal liability, separating the owner’s assets from the business’s debts and obligations. LLCs also offer tax flexibility and potential for growth.
Do I need a general business license for my sole proprietorship in New Mexico?
New Mexico does not require sole proprietors to obtain a general business license. You may need to obtain industry-specific licenses or permits based on the nature of your business.
Do I need a DBA?
New Mexico does not require registering your DBA to operate under a different name; however, filing a DBA will notify others of your new business name.
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