How to Start a Sole Proprietorship in North Carolina

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.

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.

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.

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.

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.

Keeping records is essential for maximizing tax deductions and organizing your sole proprietorship’s financial matters. Ensure you document the following:

• Income
• Expenses
• Assets and liabilities
• Inventory
• Receipts

Utilizing accounting software, spreadsheets, or setting up an organized method can simplify the task of paperwork management.

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.