How to Start a Sole Proprietorship in North Carolina
If you’re looking to start a sole proprietorship in North Carolina, you’re in the right place. This guide will walk you through the process step by step, ensuring you have all the information you need to establish your small business successfully. From choosing a business name to obtaining the necessary licenses and permits, we’ve got you covered.
What is a sole proprietorship?
A sole proprietorship is a simple form 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 types of business, such as 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 North Carolina sole proprietorship
Choose a business name
The first step in starting your sole proprietorship in North Carolina is choosing a business name. While you can use your legal name, many sole proprietors prefer to have an assumed name, also known as a fictitious business name or DBA (doing business as). This allows you to use a name other than your legal name for your business.
Here is how you register your new DBA name:
- Choose a business name: Select a name that accurately represents your business and is not already in use by another registered business in North Carolina. Be sure to avoid misleading names or certain government agency terms or abbreviations.
- Check availability: Once you have chosen your name, you have to confirm your proposed name is not already taken by another business.
Conduct a name availability search with the following government databases:
- Check the County Register of Deeds office where your sole proprietorship will operate. This will ensure that your chosen name is distinguishable from other businesses in the same county. You can find a full list of the Register of Deeds offices here.
- You can check the North Carolina Secretary of State’s business search to see if your chosen name is available statewide. This will help you in avoiding any potential conflicts with existing businesses.
- Checking the US Patent and Trademark Office’s trademark database ensures you won’t accidentally use another company’s protected name.
- Check online availability: Make sure your business name is available as a .com domain for your website. Check that social media handles of your name are available to take. Getting consistent domains and usernames creates a brand identity and makes it easier for prospective customers and clients to find you.
- Register the business name: Once you have confirmed the availability of your chosen business name, you will need to file an Assumed Business Name Certificate with the County Register of Deeds office where your business operates. This certificate will officially register your assumed name and allow you to conduct business under that name.
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.
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.
You can apply for an EIN via the Internal Revenue Service (IRS) website. The process is free, and you will receive your EIN upon completing the online application.
You can apply for your EIN here.
Obtain North Carolina business licenses, permits, and zoning clearances
There is no need for sole proprietorships to register for a general business license.
- North Carolina has an extensive regulatory, state-issued, and occupational license list. Your sole proprietorship may be subject to one or more of these licenses, depending on your business activities.
- Visit North Carolina’s Business License and Permits page for detailed information on state licensing requirements.
- The North Carolina Business and Occupational License Database lists over 950 licenses that you may need to apply for. The database also contains links and application information for each license, making it an invaluable tool.
- In addition to state licenses, you may also need to obtain licenses and permits at the local level. Contact your city or county register’s office to determine the specific local licenses and permits required for your business.
- Certain industries, such as aviation, agriculture, or firearms, may have specific federal licensing requirements. Visit the US Small Business Administration (SBA) website for information on federal licensing.
Register for taxes
In North Carolina, sole proprietors must report all business income and losses on their personal tax return, Form 1040, using Schedule C. Your net business income will be taxed at individual income tax rates.
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
- Most businesses in North Carolina must collect and remit sales and use tax on taxable sales. Visit the North Carolina Department of Revenue’s Sales and Use Tax page for more information on sales and use tax registration and reporting.
- If you have employees, you will need to register for withholding tax with the North Carolina Department of Revenue. This involves withholding and remitting state income tax from your employee’s wages.
- Depending on your business activities, you could be subject to additional business taxes, such as privilege, occupancy, or local option sales tax. Consult the North Carolina Department of Revenue’s Taxes section and check with your local city or county government for additional tax requirements.
- To register for taxes, visit the North Carolina Department of Revenue’s e-Business Center and complete the online registration form.
After securing your EIN, signing up for federal taxes, and getting the necessary licenses, you’ve crossed off all the big tasks required to launch your sole proprietorship.
Next, we’ll share some additional steps to help keep your new business aligned with rules and organized.
Open business bank accounts
Keeping your personal assets safe and creating segregation with your business finances is vital. Opening a dedicated business bank account will help you move towards this:
Setting up a business bank account comes with a host of benefits, such as:
- Simplified bookkeeping and record-keeping: When your personal and business finances don’t mix, keeping track of what you earn and spend is much simpler.
- Facilitates accurate tax reporting: If you have a bank account just for your business, spotting and reporting business transactions on your tax filings becomes much easier.
- Demonstrates professionalism: A business-only bank account gives your business a professional look and feel, boosting your credibility with customers, suppliers, and banks.
Get liability insurance
Being a sole proprietor means that you alone are responsible for any business debts, which makes insurance a key piece of your business strategy. This can help guard you against unexpected claims or incidents. Here’s what we suggest you consider:
- General business liability insurance: This policy takes care of claims related to damage to property, physical injury, or personal harm that might be connected to your business.
- Professional liability insurance: This insurance is vital if your business provides services. It helps protect you from alleged supposed negligence, errors, or oversights in your services.
Maintain business records
Keeping records is essential for maximizing tax deductions and organizing your sole proprietorship’s financial matters. Ensure you document the following:
- Assets and liabilities
Utilizing accounting software, spreadsheets, or setting up an organized method can simplify the task of paperwork management.
Sole proprietorship vs. LLC
While a sole proprietorship may seem attractive due to its simplicity and minimal legal requirements, it is important to consider the potential downsides and explore alternative business structures, such as a Limited Liability Company (LLC).
Here are some factors to consider when deciding between a sole proprietorship and an LLC:
- Liability protection: One of the significant advantages of forming an LLC is its limited liability protection. Sole proprietors are liable for any debts or legal claims against your business, which means your assets are at risk. In contrast, an LLC provides a legal separation between your personal and business assets, shielding your assets from business liabilities.
- Credibility: An LLC may enhance your credibility in the eyes of clients, partners, and potential investors. Forming an LLC demonstrates more professionalism and commitment to your business.
- Growth potential: If you plan to expand your business or attract external funding, an LLC offers more flexibility and growth potential than a sole proprietorship.
- Tax flexibility: One of the advantages of a sole proprietorship is its simplicity in taxation. You normally report business income and expenses on your tax return through a Schedule C. On the other hand, an LLC also offers tax flexibility, as it can be treated as a sole proprietorship, a general partnership, or a corporation for tax purposes.
It is important to note that forming an LLC involves additional steps and legal requirements, such as filing Articles of Organization and paying filing fees.
Do I need a business license as a sole proprietor in North Carolina?
While no general business license requirement exists for sole proprietors in North Carolina, specific industries or localities may have licensing requirements.
Can I operate my sole proprietorship under an assumed name?
Yes, you can operate your sole proprietorship under an assumed name. Be sure to follow the procedures for registering your assumed name with the County Register of Deeds office.
Can a sole proprietor hire employees?
Yes, a sole proprietor can hire employees. If you plan to have employees, you will need to obtain an EIN from the IRS for tax purposes and register for income tax withholding with the North Carolina Department of Revenue.
Is there a fee to register an assumed name in North Carolina?
The filing fee for registering an assumed name in North Carolina varies by county. Contact your local County Register of Deeds office for information on the specific fee for your area.
Do I need to separate my personal and business finances as a sole proprietor?
While not required by law, keeping your personal finances and business finances separate is highly recommended. Opening a business bank account helps you track your business income and expenses and simplify tax reporting.
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