How to Start a Sole Proprietorship in Pennsylvania

Last updated: March 16th, 2024
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Starting a sole proprietorship in Pennsylvania is a straightforward process that allows you to establish and operate a business as an individual. While there is no formal setup required, there are certain steps you can take to ensure a smooth start and protect your interests. This complete guide will walk you through the steps to start your sole proprietorship in Pennsylvania. From choosing a business name to obtaining licenses and permits, we will cover all the essential aspects.

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What is a sole proprietorship?

A sole proprietorship is a straightforward type of business you can establish. 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 Pennsylvania sole proprietorship

1

Choose a business name

The first step is choosing a business name. You have the option to use your legal name or create a fictitious business name, also known as a “DBA” (Doing Business As). A DBA allows you to use a business name other than your personal name, which can be more professional and appealing to customers.

Here are the steps to filing your DBA:

  1. Choose a business name: When thinking of potential names, aim for something memorable that describes what your business does. A name that captures your products or services can help create a recognizable brand.
  2. Check availability: Once you have thought of a few potential names, you should check their availability.

Use these online tools to help:

  1. Check online availability: See if your business name can be registered as a .com and if top social media channels have handles for you to use. Unified domains and usernames improve brand consistency, making your business easier to access online.
  2. Register the business name: To register your fictitious business name, complete the Registration of Fictitious Name form provided by the Pennsylvania Department of State. The form can be downloaded as a PDF from their website, or you can complete it online on the Pennsylvania Business Filing Services website. When you submit your form, you need to attach a filing fee.
2

Obtain an (Employer Identification Number) EIN

As a sole proprietor, you may not be required to obtain an EIN, especially if you have no employees. In such cases, you can use your Social Security Number (SSN) as your tax ID. However, obtaining an EIN can provide privacy benefits and help streamline certain business operations.

  • Opens up business banking opportunities: Obtaining an EIN enables the opening of dedicated business bank accounts, credit cards, and financing.
  • Helps establish business credit: An EIN allows building business credit rather than relying solely on personal credit history.
  • Eases the hiring process: Getting an EIN distinguishes the business finances and tax documentation from the owner’s finances.
  • Enhances business privacy: Using an EIN instead of an SSN on business documents enhances privacy protections.
  • Prepares for business growth: An established EIN can simplify future transitions to more structured business entities.
3

Obtain Pennsylvania business licenses, permits, and zoning clearances

You can apply for your EIN here.

  • Sole proprietors are not required to obtain a general business license.
  • Depending on your business activities, you will probably be required to get certain licenses.
  • To determine if your business requires state-level licenses, visit the Pennsylvania Licensing System. The system provides information on various state licenses and permits, including professional licenses, occupational license requirements, and the application and renewal processes.
  • Each city or town in Pennsylvania may have its specific licensing requirements. It is important to check with your local government to determine if there are any additional licenses or permits you need to obtain.
  • If your business engages in activities regulated by federal agencies, such as selling alcohol, firearms, or aviation services, you may need to obtain specific federal licenses. Visit the U.S. Small Business Administration’s website for more federal permits and license information.
4

Register for taxes

Sole proprietors use Schedule C to report their business income and expenses on their personal income tax return (Form 1040). You may also need to pay self-employment taxes, which include Social Security and Medicare taxes, which you can adhere to by using Schedule SE.

Access the information and the most current versions of Form 1040Schedule C, and Schedule SE on the Internal Revenue Services (IRS) website.

Additional state and local taxes

  • Pennsylvania imposes several state taxes that may apply to sole proprietors, such as income tax, sales tax, use tax, and employer withholding taxes. Register for these taxes and obtain more information on the Pennsylvania Department of Revenue website.
  • Register with myPATH’s “Pennsylvania Online Business Tax Registration” service if you want to register to file taxes online. This service has replaced Pennsylvania Online Business Entity Registration (PA-100).
  • Some local municipalities in Pennsylvania may impose additional taxes or require tax registration. Check with your local government to determine if there are any local taxes you need to register for.

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 new business.

We suggest a few more tasks to help your small business stay aligned with rules and well-organized.

5

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.
6

Get liability insurance

As a sole proprietor, you will 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.
7

Maintain business records

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.

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 personal 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 personal 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.

FAQs

What is the difference between a single-member LLC and a sole proprietorship? 

A sole proprietorship is the simplest business structure, owned and operated by one person without legal separation between the owner and the business. A single-member LLC also has one owner but offers a legal distinction between the owner and the business, providing limited liability protection. Both are taxed as “pass-through” entities, but the LLC can choose corporate taxation.

Can I hire employees as a sole proprietor in Pennsylvania?

Yes, as a sole proprietor in Pennsylvania, you can hire employees. If you have employees, you must register for an EIN and comply with all relevant employment laws and tax obligations.

Can I convert my sole proprietorship to an LLC in Pennsylvania?

Yes, you can convert your sole proprietorship to an LLC in Pennsylvania. The process typically involves filing the necessary formation documents and may require additional steps, such as obtaining a new EIN.

What is the difference between a sole proprietorship and a partnership?

A sole proprietorship is a business owned and operated by a single individual. A partnership involves two or more individuals sharing ownership, responsibilities, profits, and liabilities.

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