How to Start a Sole Proprietorship in New York
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Starting a sole proprietorship in New York is a straightforward process that doesn’t require any formal setup or fees. As a sole proprietor, you have the freedom to operate under your own name or choose an assumed name for your business. While there are no strict requirements, you can take several steps to ensure your venture’s success and legality. This guide will walk you through starting a sole proprietorship in New York, covering everything from choosing a business name to obtaining licenses, permits, and tax requirements.
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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 setup 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 New York sole proprietorship
Choose a business name
By default, the name of the sole proprietorship must be the same as the owner’s legal name.
If you want to use a different name, you must file a “Doing Business As” (DBA), also known as an assumed name in New York.
Here is how you file a DBA:
- Choose a business name: When thinking of potential names, aim for something memorable and descriptive. A name that captures your business’s uniqueness can help create a recognizable brand.
- Check availability: Before finalizing a name, it’s essential to ensure that another business does not already use it.
You can check the availability of your chosen name by searching the following resources:
- The New York Department of State’s Business Entity Search to see if any other New York State businesses are using that name.
- The United States Patent and Trademark Office’s Trademark Electronic Search System to check that you are not infringing on anyone else’s intellectual property.
- It’s also good to search locally through county clerk offices or online business name search sites.
- Check online availability: Confirm the availability of your business name as a .com and on major social networks. Having consistent online identities boosts brand awareness and simplifies online searches for your company.
- Register the business name: Once you’ve confirmed the availability of your chosen name, you can register it as an assumed name. File a Certificate of Assumed Name with the County Clerk’s office where your business is located, along with a filing fee.
The registration process may require filing a Business Certificate, also known as a “DBA certificate,” establishing your right to use the assumed name.
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 IRS as a sole proprietor:
- Opens up business banking opportunities: An EIN facilitates the opening of 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 New York business licenses, permits, and zoning clearances
- While there is no general business license in New York, specific state and local permits may be required.
- Use New York’s Business Express system to determine which licenses and permits apply to your sole proprietorship. This system provides tailored licensing instructions based on your business details.
- New York has many licenses that may apply to different industries and professions. Check the Licensing section of the New York State government’s website for a comprehensive list of licenses and who they apply to.
- Certain businesses, such as those involved in agriculture, aviation, or firearms, may require federal licenses or permits. To determine if your business falls into these categories, visit the U.S. Small Business Administration’s Licenses and Permits page.
Register for taxes
New York sole proprietors will need to report their income and expenses on their personal tax return, usually by filing Schedule C with Form 1040. Check the Internal Revenue Service (IRS) website for details on the forms and how to complete them properly.
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 on the IRS website.
Additional state and local taxes
- If your business sells goods or certain services, you may have to collect and remit sales tax to the State of New York. Determine your local sales tax rate by reviewing your jurisdiction with the Department of Taxation and Finance.
- The New York State Department of Taxation and Finance has a useful business taxes webpage where you can register for additional taxes and make payments.
Additional steps
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 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
Sole proprietors 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:
- Earnings
- Costs
- Assets and debts
- Stock
- Invoices
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.
FAQs
What is the difference between a DBA, fictitious business name, trade name, and assumed name?
There is no difference. They are different names for “doing business as,” which allows sole proprietors to operate under a name other than their own. In New York, they are known as an assumed name.
Do I have to get an EIN, or can I just use my SSN?
You can use your social security number as your tax ID, but we recommend obtaining an EIN. It will allow you to open business bank accounts and make transitioning into an LLC easier.
How often do I need to renew my business name or license in New York as a sole proprietor?
The frequency of renewals varies. Typically, a DBA (or assumed name) registration in New York lasts for five years. As for licenses, the renewal period can range from annually to every several years, depending on the specific license.
Do sole proprietors need a business license in NY?
New York does not require a general business license for sole proprietors. However, certain occupations and activities necessitate professional or industry-specific licenses and permits. Sole proprietors should verify requirements with the New York Department of State, their county clerk’s office, and relevant local agencies based on their business activities and location.
What is the difference between a sole proprietorship and a general partnership?
A sole proprietorship is owned and operated by one person, while a partnership involves two or more owners sharing management and profit/losses. Partnerships require formal agreements outlining the rights and responsibilities of partners. Unlike partnerships, sole proprietors have complete control but bear full liability for their business.
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