How to Start a Sole Proprietorship in Washington
Starting a sole proprietorship in Washington is a relatively straightforward process that allows individuals to operate their businesses with minimal legal requirements. This thorough guide will walk you through starting a sole proprietorship in Washington, from choosing a business name to obtaining necessary licenses, registering for taxes, and opening a business bank account. Following these steps, you can establish your sole proprietorship and begin your entrepreneurial journey in Washington.
What is a sole proprietorship?
A sole proprietorship is the most straightforward type of business you can establish. It is popular with entrepreneurs and small business owners due to its ease of setup. 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 Washington sole proprietorship
Obtain Washington business licenses, permits, and zoning clearances
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.
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.
Choose a business name
In most states, you can register your new business name before you apply for business licenses. However, in Washington, you can submit your business name when you submit your business license application.
Your business name can be your legal name or a trade name, sometimes known as a “doing business as” (DBA) name.
Here are the steps to filing your DBA:
- Choose a business name: Creating a memorable business name that accurately describes your services can be an effective marketing tool that boosts your brand image and attracts potential customers. A strong business name can help you establish your brand identity and build a customer base.
- Check availability: After you have thought of a few business names, you need to confirm that your name is unique.
Here are the resources to check:
- The Washington Department of Revenue’s Business Lookup confirms that your name can be used in the state.
- Washington Secretary of State’s corporation and business entity search allows you to double-check that your name is unique and not in use.
- The US Patent and Trademark Office protects against trademark overlaps and potential infringements on intellectual property.
- Check online availability: Check whether your desired name is available as a .com domain and on different social media platforms to increase your business’s online presence. This tactic enhances the recognition of your brand and improves its accessibility to potential customers in the digital world.
- Register the business name: When filling in your business license application, you can tick “Register trade name” in section 1 of the form. Filing for a trade name incurs an extra filing fee on top of the fee for registering for a general business license.
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 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.
Register through the IRS website or click here to obtain an EIN.
Register for taxes
As a sole proprietor in Washington, you are responsible for reporting and paying taxes on your business income.
Your business’s profits and losses get reported on your Form 1040 tax return. Attach Schedule C to list your sole proprietorship’s income and expenses.
You’ll also need to pay self-employment tax for Social Security and Medicare, calculated on Schedule SE.
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.
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 small 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 type of 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
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
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 an operating agreement and annual reporting. Sole proprietorships have less paperwork.
- Cost: LLC formation and maintenance fees are higher than a sole proprietorship.
- Consult a tax professional to decide which structure best fits your business.
- Weigh liability protection vs. simplicity based on your goals and risk factors.
What is a sole proprietorship, and how is it different from other business structures?
A sole proprietorship is the simplest type of business structure. In this setup, the business and the owner are considered the same entity, meaning the owner has complete control but also holds personal liability for any business debts or obligations. Unlike LLCs or corporations, sole proprietorships require less paperwork and are easier to set up.
Do I need a business license to start a sole proprietorship in Washington?
You must acquire a general state-level business license to operate a sole proprietorship in Washington. You may also need additional federal, state, or local licenses or permits depending on your business activities.
How can I check the availability of my desired business name?
You can check the availability of your name by using the Washington Department of Revenue’s Business Lookup tool and the Washington Secretary of State’s corporation and business entity search. It’s also advisable to check for trademark overlaps at the US Patent and Trademark Office.
Is obtaining an Employer Identification Number (EIN) mandatory for a sole proprietorship in Washington?
An EIN is not mandatory for sole proprietors without employees. However, it is recommended because it allows you to open a business bank account, enhances privacy, helps establish business credit, and simplifies the hiring process should you decide to have employees in the future.
What taxes am I responsible for as a sole proprietor in Washington?
While Washington State does not have a personal or business income tax, you are responsible for federal income tax and self-employment tax for Social Security and Medicare as a sole proprietor. Depending on your business activities, you may also need to collect and remit sales tax and use tax.
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