When starting a new business, one of the first steps you need to take is choosing the business structure. In Maryland, many entrepreneurs opt for a sole proprietorship. But why is this choice so popular, and is it the right choice for you?
In Maryland, a staggering 74.5% of all small businesses are sole proprietorships1 out of a total of 658,422 small businesses. This significant percentage speaks volumes about the popularity of this business structure in the state.2
In this guide, you’ll learn what a sole proprietorship is, its pros and cons, and a step-by-step guide on how to register your business in Maryland. We’ll cover the basics, explain the advantages and disadvantages, and guide you through the registration process.
Related: How to start a business in Maryland
What is a Sole Proprietorship?
A sole proprietorship is a business structure where one individual owns and operates the entire business. There are other types of business structures, such as general partnerships, corporations, and limited liability companies (LLCs). Sole proprietorships are popular due to their simplicity, but each has its own set of rules, advantages, and limitations.
Sole Proprietorship Advantages
- Lowest startup costs: This is a big draw. Sole proprietorships in Maryland have the lowest startup costs compared to other business structures. This is particularly helpful for first-time entrepreneurs who are testing an idea or working with a limited budget.
- Tax simplicity: Sole proprietorships are not taxed separately as the owner’s personal income tax return covers the business’s revenue. This means fewer tax filings.
- Control: Being a sole proprietor means you have complete control over all business decisions and operations. You don’t have to consult partners or board members, making it easier to respond rapidly to changes in your industry or the market.
Sole Proprietorship Disadvantages
- Unlimited personal liability: One of the most significant drawbacks of a sole proprietorship is unlimited personal liability. As a sole proprietor, you are personally responsible for all of the business’s debts and liabilities. If the company were to face financial issues, your personal assets could be at risk.
- Limited life: Because sole proprietorships don’t have legal separation from their owners, the life of the business is limited to the owner’s lifespan or their ability to run it. When the owner decides to retire or if they pass away, the business will need to dissolve.
- Self-employment taxes: Sole proprietors in Maryland are subject to self-employment taxes, which can be higher than other business structures.
To sum up, if protecting your personal assets is important, consider forming a Limited Liability Company. A Maryland LLC can offer more liability protection than a sole proprietorship, making it a better choice for some businesses.
Related: How to form a Maryland LLC
Steps To Start A Maryland Sole Proprietorship
In Maryland, getting a sole proprietorship off the ground is fairly straightforward, as you aren’t required to register it with the state. However, there are a few steps to make sure the business is legally set up.
Step 1: Decide on a Business Name
Choosing a business name is the first step in starting a sole proprietorship. In Maryland, you can choose to either operate under your full first and last name or register a specific business name. For instance, if Sam Stark wants to open a bakery, he may decide to operate with his legal name, “Sam Stark,” which skips the need to register the name. But, if Sam prefers a distinct name such as “Sam’s Delicious Pastries,” he needs to register this name.
Step 2: Verify Name Availability
In order to register a business name, it must be a name that doesn’t closely resemble any other existing business names in the state. Before submitting your chosen business name, make sure you check this through the Maryland business name database.
Step 3: Fill Out the Trade Name Form
Once you’ve picked an available name, the next step is to register it. Visit the Maryland Business Express website, operated by the Maryland Department of Assessments & Taxation, and fill out the Trade Name form (also known as a DBA or Doing Business As name).
It’s worth noting that registering a business name in Maryland won’t prevent a business in another state from using the same name. For stronger legal protection of your name, consider applying for a trademark.
Related: How to fill out the Maryland Trade Name form
Step 4: Check Business License Requirements
Last, after finalizing the sole proprietorship, there will likely be a number of business registrations. The requirements vary depending on your business activities and location, but some common ones you might need include:
Local business license: While the state of Maryland doesn’t require a general business license, many cities in the state require businesses to be licensed.
Trader’s license: If you plan to sell products, you’ll need a Trader’s License, obtained from the Clerk of the Circuit Court in the county where your business will operate.
Sales & Use Tax License: A Sales & Use Tax License from the Comptroller of Maryland is needed for businesses selling products and some services.
Occupational license: Some occupations in Maryland, like contractors, accountants, or landscapers, must be registered and licensed before offering their services.
Employer Identification Number (EIN): A sole proprietor with employees will need an EIN, which is a unique number required by the IRS for tax reporting. Sole proprietors without employees can use the owner’s social security number instead.
Wrapping Up
With its simplicity, along with minimal setup requirements, the sole proprietorship offers a straightforward path for entrepreneurs. Nevertheless, it’s important to evaluate the potential risks involved. By following the steps in our guide you’ll be better equipped to make a decision that suits your needs.
Are you considering a sole proprietorship in Maryland? Share in the comments why this model appeals to you, or if you have any questions.
