One of the first steps when starting a business is selecting a business structure. This is an important step because it can have a big impact on your tax obligations, liability, and overall business operations.
In Massachusetts, sole proprietorships make up a significant portion of businesses. Out of 776,124 small businesses in the state, 71.2% are sole proprietorships.1 This highlights the popularity of this business structure among local entrepreneurs.
In this guide, you’ll learn what a sole proprietorship is, reasons to choose it as your business structure, as well as potential drawbacks, and finally, the steps to get one registered in Massachusetts.
Related: Massachusetts Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is a type of business structure in which one individual owns and runs the entire business. It’s one of many options, such as general partnerships, corporations, and Limited Liability Companies.
Sole Proprietorship Advantages
There are various reasons why someone may choose to start a sole proprietorship in Massachusetts:
- Simplicity: Establishing a sole proprietorship doesn’t take much to register or administer. You don’t need extensive paperwork or legal formalities, making it an accessible option for many.
- Lowest startup costs: Forming a sole proprietorship has very little startup costs. You don’t have to file formation documents or pay fees as you would with a corporation or LLC. This makes it the most affordable and quickest option to get your business up and running.
- Tax simplicity: Sole proprietorships benefit from tax simplicity. Income is reported on the owner’s personal tax return, avoiding the complexity of corporate tax filings.
Sole Proprietorship Disadvantages
However, it’s not all clear sailing with sole proprietorships. There are a few important drawbacks:
- Unlimited personal liability: As a sole proprietor in Massachusetts, there’s no legal separation between you and your business. This means personal assets could be at risk if your business faces debts or lawsuits.
- Limited life: In Massachusetts, a sole proprietorship ends if the owner retires, passes away, or decides to close the business. This limits its longevity compared to other business structures.
- Potential tax disadvantages: As a sole proprietor, your business income is your personal income. This could move you into a higher tax bracket, meaning you might have to pay more taxes.
On a final note, if you are concerned about protecting yourself from business liabilities, it may be worth considering setting up a Limited Liability Company (LLC) instead.
Related: How To Form A Massachusetts LLC
Steps to Start a Sole Proprietorship in Massachusetts
In Massachusetts, setting up a sole proprietorship is pretty straightforward; however, there are additional steps to ensure your business operates legally and smoothly. Some of the most common include:
Step 1: Choose a Business Name
In Massachusetts, you can run your sole proprietorship under your own full first and last name. For instance, if your name is Henry Walker, that can be the name of your business, and you can move on to Step 3. If you choose to operate under a different name, such as “Big Apple Orchards,” you’ll need to get it registered.
Step 2: File the Business Certificate (DBA)
If you’re using a specific business name, you need to register it with your local town or city. This process, known as filing a Business Certificate, which is commonly known as a “Doing Business As” (DBA) certificate, creates a public record of your business name and address.2
Registering an assumed name in Massachusetts doesn’t prevent others from using it. For stronger legal rights, consider applying for a trademark.
Related: How To Register For A Massachusetts DBA
Step 3: Research Business License Requirements
Regardless of the structure, your business may need specific licenses or permits. These vary based on what your business does and where it’s located. Here’s a summary of potential licenses:
- Local business license: While there is no state business license, your business may need a local business license. Check with city officials or the economic development office.
- Massachusetts sales tax vendor registration: If you sell products or certain services, you must register with the Department of Revenue for a Massachusetts sales tax permit.
- Occupational license: Certain professions, like plumbers, cosmetologists, and electricians, require a state license. Contact the Massachusetts Division of Professional Licensure for details.
- Employer Identification Number (EIN): If you plan to hire employees, you’ll need an EIN from the IRS. If not, your Social Security Number will suffice for tax purposes.
Related: Guide To Registering A Business In Massachusetts
