How to Start a Sole Proprietorship in North Dakota

Last updated: March 13th, 2024
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Starting a sole proprietorship in North Dakota is a straightforward process that allows entrepreneurs to establish their businesses quickly and easily. A sole proprietorship is a popular choice due to its simplicity and flexibility. This guide will walk you through the steps to start your sole proprietorship in North Dakota, including choosing a business name, obtaining necessary licenses and permits, registering for taxes, opening a business bank account, and more.

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What is a sole proprietorship?

Creating a sole proprietorship is the simplest way to set up a business. The business and the owner are seen as the same legal entity in a sole proprietorship.

This means that you have complete control over your business, but you hold personal liability for any debts or obligations of the business.

A step-by-step guide to starting your North Dakota sole proprietorship

1

Choose a business name

Choosing a name for your new business is an important first step. While you can use your legal name, many individuals generally prefer a trade name or “doing business as” (DBA) name for their business.

Here are the steps to filing your DBA:

  1. Choose a business name: When coming up with a name for your business, it’s important to be imaginative and use terminology that conveys the nature of your enterprise. Consider including words that align with your niche and appeal to your ideal customer base throughout the naming process.
  2. Check availability: You must confirm your proposed name is unique before registering it. Certify that no other company has registered your chosen name by cross-checking state and federal databases.

There are two key resources to check:

  1. Check online availability: You must submit a completed Trade Name or Fictitious Name application with the Secretary of State. Registering your trade name provides exclusivity and legitimacy to your business.
  2. Register the business name: You must submit a completed Trade Name or Fictitious Name application with the Secretary of State. Registering your trade name provides exclusivity and legitimacy to your business.

To register your trade name, visit the North Dakota Secretary of State’s First Stop website and follow the instructions to file the Trade Name or Fictitious Name application. You must attach a filing fee when you submit your application.

2

Obtain an (Employer Identification Number) EIN

While obtaining an Employer Identification Number (EIN) is not mandatory for sole proprietors without employees, it is recommended.

An EIN is a nine-digit number issued by the Internal Revenue Service (IRS). It serves as a unique tax ID for your business and can provide several benefits:

  • Opens up business banking opportunities: Having an EIN allows you to open a business bank account separate from your accounts. This separation helps you maintain clear financial records and simplifies tax filing.
  • Helps establish business credit: With an EIN, you can start building a separate credit history for your business, which may be beneficial when applying for loans or lines of credit.
  • Eases the hiring process: If you plan to expand your sole proprietorship and hire employees, having an EIN is necessary for payroll tax reporting and other employment-related requirements.
  • Enhances business privacy: Using an EIN instead of your Social Security Number (SSN) on invoices and contracts adds an extra layer of privacy and identity protection.
  • Prepares for business growth: If you have plans to grow your business and potentially convert it into a different business entity, such as a Limited Liability Company (LLC) or a corporation, having an EIN is a crucial step in the transition process.

Register through the IRS website or click here to obtain an EIN.

3

Obtain North Dakota business licenses, permits, and zoning clearances

  • North Dakota doesn’t require sole proprietors to obtain a general business license.
  • Depending on the nature of your business, you may need to obtain various licenses, permits, and zoning clearances to operate legally in North Dakota.
  • Start by visiting the State of North Dakota New Business Registration website to determine the licenses and permits required for your specific business. The website provides comprehensive information on state-level licenses and permits.
  • You should also check with your local government to determine if there are any additional licenses, permits, or zoning clearances required at the local level
  • Engaging in activities regulated by federal agencies may require your business to obtain specific federal licenses. Visit the US Small Business Administration’s website for more information.
4

Register for taxes

Running a sole proprietorship in North Dakota means your business finances become part of your personal tax return. You’ll attach Schedule C to Form 1040 to break down your business income and expenses.

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 information and the most current versions of Form 1040Schedule C, and Schedule SE on the IRS website.

Additional state and local taxes

If your sole proprietorship buys or sells goods or products, you must likely register and pay sales tax and use tax. You can find more sales and use tax information on the North Dakota Tax website.

In addition to state taxes, you may also be subject to local taxes, which vary depending on the jurisdiction in which your business operates. To determine which local taxes you can pay, consult the North Dakota guide to local taxes by location.

Additional steps

Completing your EIN application, federal tax registration, and securing necessary licensing checks the core boxes for establishing your sole proprietorship. With the legal basics covered, it’s wise to take extra steps to set up your new business for ongoing success.

5

Open business bank accounts

Keeping your business and personal finances separated is key for accurate record-keeping and protecting your personal assets. Think about opening:

  • Business bank account: A dedicated business account to manage income, expenses, and transactions maintains clear separation from your funds. This also lends credibility when working with vendors or applying for financing.
  • Business credit card: Opening a card in your business’s name further segments spending and builds credit history specific to your company’s financial profile.
6

Get liability insurance

Sole proprietors carry unlimited liability for business obligations, so insurance is critical. Policies can shield against unexpected claims or events. Consider:

  • General business insurance: Covers claims of property damage, bodily harm, or personal injury resulting from your operations.
  • Professional liability insurance: For service providers, it protects against alleged negligence, errors, or omissions in delivering your services.
7

Maintain business records

North Dakota requires new businesses to maintain complete and accurate accounting records. Detailed record-keeping helps maximize tax deductions and organize your finances.

We recommend keeping records of the following:

  • Income earned
  • Expenses
  • Assets/liabilities
  • Inventory
  • Receipts

We recommend using bookkeeping software, spreadsheets, or an organized filing system to stay on top of your record-keeping. This will ensure you have all the necessary documentation come tax time.

Sole proprietorship vs. LLC

For some small businesses or startups, forming an LLC may be preferable to a sole proprietorship.

Here are some key advantages an LLC holds:

  • Liability protection: LLCs legally separate your personal and business assets. Sole proprietorships do not.
  • Credibility: An LLC’s structure appears more professional with customers.
  • Growth potential: LLCs are better suited if you plan to expand your business.
  • Tax flexibility: LLCs allow you to choose how your business is taxed. Sole proprietorships do not.

However, there are tradeoffs to consider:

  • Complexity: LLCs require more paperwork. The paperwork includes filing articles of organization and annual reports. A sole proprietorship is the simplest type of business to register.
  • Cost: LLC formation and maintenance fees are higher than a sole proprietorship.

Tips:

  • Consult a tax professional to decide which structure best fits your business.
  • Weigh liability protection vs. simplicity based on your goals and risk factors.

FAQs

Can I operate my sole proprietorship under a different name?

Yes, you can operate your sole proprietorship under a different name. This is known as a trade name or fictitious name. You must file a Trade Name or Fictitious Name application with the Secretary of State to use a trade name.

Do I need an EIN for my sole proprietorship?

If you do not have employees, you are not required to get hold of an Employer Identification Number (EIN) as a sole proprietor. However, some banks may require an EIN to open a business account. It is recommended to obtain an EIN, as it can be useful for various business purposes.

What licenses and permits do I need for my sole proprietorship in North Dakota?

The licenses and permits required for your sole proprietorship will depend on the nature of your business. Start by visiting the State of North Dakota New Business Registration website to determine the licenses and permits required at the state level.

Can I have a partner in a sole proprietorship?

No, a sole proprietorship is designed to be run by a single individual. If you want a partner, you may need to consider other business structures like a partnership or an LLC.

What are the ongoing compliance requirements for a sole proprietorship in North Dakota?

While sole proprietorships have fewer compliance requirements than other business structures, you must keep accurate financial records and file taxes annually. According to state or local regulations, any licenses or permits must be renewed.

Should I consider forming an LLC instead of a sole proprietorship?

If you are concerned about personal liability and want additional tax benefits, you may want to consider forming a North Dakota LLC instead of a sole proprietorship. It is recommended to consult with a business attorney to determine the most suitable business structure for your needs.

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