Start-Up Bureaucratic Requirements for Sole Proprietorships

Make sure you know the various federal, state, and local registrations that identify your sole proprietorship for tax and legal purposes.

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Even sole proprietors need to tackle a few legal and governmental hurdles. Since a sole proprietorship is by definition a business that hasn't formed a separate legal entity (unlike LLCs and corporations), you don't need to file any paperwork to create the business itself. Still, there are a few bureaucratic requirements that do apply. As described below, these mostly relate to various registrations that enable federal, state, and local governments to identify your sole proprietorship for tax and legal purposes.

Start-up requirements for sole proprietors are outlined below. As you'll see, the legal and bureaucratic red tape isn't as bad as you may fear.

Step 1: Obtain a Federal Employer Identification Number (EIN).

An EIN (also sometimes referred to as an FEIN) is like a Social Security number for your business: It identifies the business to the IRS. Technically, sole proprietorships are not always required to obtain an EIN except in certain circumstances such as when they have one or more employees or use a Keogh retirement plan.

Even if it's not required, many sole proprietors elect to use an EIN because it reduces the chances of identity theft, which is a concern when your Social Security number appears on many business documents. In addition, some banks require an EIN to open a business account.

The easiest way to get your EIN is to apply online at the IRS's website. Another method is to fill out and submit Form SS-4, also available at irs.gov.

Step 2: Register your fictitious business name (FBN) with your county or state.

A business name that doesn't contain the legal (last) name of the owner/sole proprietor is called a fictitious business name (FBN). If you use a fictitious business name, you'll typically have to register it with your state or county. So if Marie Simone used her legal name in the business name — as in "Marie Simone Landscaping" or even "Simone Landscaping" she shouldn't have to register an FBN. But if she named her business "WaterWise Landscapes," "Marie's Gardens," or anything that didn't include her last name, she'd need to register the name.

Registration is typically done at the county level, though it's sometimes done with the state. Besides filing the paperwork and paying the necessary fees, in many states you'll need to publish your FBN statement in an approved newspaper in the county where you filed it. Contact your county clerk or state agency for details and a list of acceptable publications.

Step 3: Obtain a local tax registration certificate.

Most cities (or counties, if you live in a rural area) require all businesses (including home businesses) to register with the local tax collector, regardless of business type, structure, size, or name. Depending on your city or county, there may be different names for the process: tax registration, business tax application, business license application, or tax certification, for example. In a nutshell, getting a tax certificate is your local government's way of charging a fee and/or other taxes upon your business. The office that handles local tax registration is sometimes called a tax registration office, tax collector, or city treasurer. Contact your local office for details on handling this registration.

Step 4: Obtain a permit to sell retail goods and collect state sales tax.

In most states, any business — whether it's a sole proprietorship, partnership, LLC, corporation, or any other type — must have a seller's permit if it sells any tangible goods to the public. Tangible goods are things you can touch, such as furniture, clothing, or food. Businesses that sell only services, such as a color consultant or tax preparer, are often (but not always) exempt from the seller's permit requirement.

A seller's permit allows your business to collect sales taxes from customers to cover any sales tax that you'll owe to the state, which is generally calculated as a percentage of your taxable sales. You'll typically pay any taxes you owe at year-end, semiannually, quarterly, or monthly.

To obtain a seller's permit, contact the agency in your state that governs sales taxes, which may or may not be the same agency that deals with income taxes. The process of obtaining a seller's permit typically consists of submitting a simple application form and, sometimes, paying a fee.

Step 5: Obtain specialized vocation-related licenses or environmental permits if necessary.

Various licenses and permits are required of certain businesses for certain activities, sometimes for certain locations. Figuring out what permits or licenses you might need can be confusing as there are literally hundreds of independent agencies from the local to the federal level that regulate various businesses. So here's a quick overview of who typically regulates what:

  • Local business regulations and zoning laws regulate which activities are allowed in particular locations. Assuming your business has met zoning requirements, it still might need to be approved by other city agencies, such as the fire or police departments, the building inspector, or the department of public health. You'll typically learn about what requirements apply to your business when you complete the local tax registration process.
  • State regulations often focus on how you conduct your business and public safety. For instance, your state wants to make sure that your cosmetologists are competent, your bartenders know when to cut someone off, and that your carpenters do safe work. Your state may require the business owner and certain employees (the ones performing the activity) to take a class, pass a test, and pay a fee to obtain a license. Check your state websites (including its tax agency and secretary of state) to see if they offer small business assistance or a "one-stop-shop" for licensing information.
  • The federal government doesn't regulate small businesses as heavily as local and state offices, but you may need a federal permit or license to engage in certain activities such as manufacturing drugs or meat products (Food and Drug Administration), alcohol or tobacco products (Bureau of Alcohol, Tobacco and Firearms), or providing investment advice or counseling (Securities and Exchange Commission).
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