How to Start a Sole Proprietorship in Washington

State business license

Washington sole proprietors must acquire a general state-level business license to operate legally. There are a few options for obtaining your Washington business license:

• Apply online using the Business Licensing Service, which walks you through filling out the business license application.
• Download the business license application form and mail it in with the licensing fee. The form can be found on the Department of Revenue website.
• In-person, visit a local Business Licensing Service office to submit the application and fee.

The Department of Revenue also hosts a useful video, guiding you fully through applying for a general business license as a sole proprietor.

Your general state business license may cover all of your business activities. However, certain activities require additional endorsements for an extra fee. For example, selling tobacco products or providing child care services.

Once approved, you’ll receive your Unified Business Identifier (UBI) number and your business license number in Washington. Renewals are required every year by the end of the expiration month indicated on your license.

Additional business licenses

• You may need to apply for additional licenses depending on your business activities.
• To determine whether your sole proprietorship requires a state license or permit, visit the Washington State Business Licensing Service website.
• The Washington State Department of Licensing allows you to apply for any additional licenses or permits you may need.
• Certain types of businesses require federal licenses or permits. Examples include aviation, broadcasting, drug manufacturing, and firearms dealing. To determine whether your sole proprietorship requires a federal license or permit, visit the US Small Business Administration’s License and Permit Tool.
• In addition to federal and state licenses, you may need local licenses or permits based on your business location. Distinct cities and counties within Washington may have specific licensing requirements and regulations for businesses operating within their jurisdiction.

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

An EIN is a nine-digit ID number issued by the Internal Revenue Service (IRS). It serves as a unique identifier 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.

Additional state and local taxes

• While Washington State does not have a personal or business income tax, there are other business taxes that you may be liable for.
• Retail Sales Tax: If your sole proprietorship engages in retail sales of goods, you may be required to collect and remit sales tax to the state.
• Use Tax: If your business purchases goods or services subject to sales tax from out-of-state sellers and does not pay sales tax, you may be required to remit use tax.

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 type of insurance is vital if your business provides services. It helps protect you from alleged supposed negligence, errors, or oversights in your services.

Washington 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.

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 an operating agreement and annual reporting. Sole proprietorships have less paperwork.
• Cost: LLC formation and maintenance fees are higher than a sole proprietorship.