Choosing a business structure is one of the first decisions you’ll need to make when starting a business. Four main options exist: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). This choice lays the foundation for how your business will be taxed.
In Montana, sole proprietorships make up a significant portion of the business landscape. Of the 140,168 small businesses in the state, 84,219 are sole proprietorships, accounting for 60.10% of all small businesses.1 Each structure has unique features and implications, but for many, a sole proprietorship stands out due to its simplicity and straightforward nature.
In this guide, we’ll walk through what a sole proprietorship is, its advantages and disadvantages, and provide a step-by-step process for registering your business.
Related: Montana Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is a business owned and operated by one person, where there is no legal distinction between the owner and the business entity. It’s a popular choice for small business owners in Montana due to its cost and simplicity. Unlike other business structures like general partnerships, corporations, and LLCs, a sole proprietorship is the most straightforward to set up and manage.
Sole Proprietorship Advantages
- Simplicity and ease of formation: Setting up a sole proprietorship is relatively simple and does not require extensive paperwork or formal processes compared to setting up an LLC or a corporation.
- Lowest startup costs: A sole proprietorship is the most affordable structure because there is no paperwork to create it (there is a fee to register the business name).
- Tax simplicity: Your business income and losses are reported on your personal tax return. You don’t have to file a separate business return.
Sole Proprietorship Disadvantages
- Unlimited personal liability: As a sole proprietor, you are personally responsible for all business debts and legal liabilities. Creditors can pursue your personal assets if the business can’t cover its obligations.
- Limited life: A sole proprietorship essentially ends if you retire, pass away, or become unable to work. It has limited continuity.
- Self-employment taxes: Sole proprietors in Montana are subject to self-employment taxes, which can be higher than the taxes a corporation or LLC might pay.
Forming an LLC is worth considering if limiting personal liability is important to you. LLCs protect your personal assets from business debts and lawsuits.
Related: How To Form A Montana LLC
Steps to Start a Sole Proprietorship in Montana
Starting a sole proprietorship in Montana is straightforward, as it does not require filing any legal documents with the state government to legally create the business entity. However, there are a few things to take care of to get the business properly set up.
Step 1: Come Up with a Business Name
As a sole proprietor in Montana, the owner can operate under their full legal name. However, registration is required to do business under a specific name or “DBA.” For example, Sara James is starting a bakery business. Instead of operating as just “Sara James,” she wants to use the name “Mountain Top Baked Goods.” In this case, Sara will register the DBA name “Mountain Top Baked Goods” with the state.
Step 2: Verify Name Availability
Before you can register your chosen business name in Montana, you need to verify that it is unique and not already in use. The Montana Secretary of State provides an online database where you can check the availability of your desired name.
Related: How To Check Business Name Availability In Montana
Step 3: File the Assumed Name Registration Form
If operating under a DBA, the business owner must register it by filing an Assumed Business Name Certificate with the Montana Secretary of State’s office. This can be done through their ePass website. The current fee is $20.
Registering an assumed name in Montana doesn’t prevent another business from using it. If you want stronger legal rights to your business name, consider applying for a trademark through the U.S. Patent & Trademark Office (USPTO).
Related: How To File A Montana Assumed Name
Step 4: Research Business License Requirements
While no state business license is required in Montana, certain local and professional licenses may be needed depending on location and business activities:
- Local business license: Many cities require a business license to operate. Check with the local county or city office.
- Professional license: Several professions in Montana are regulated and need registration before offering certain services. Common examples include barbers, cosmetologists, massage therapists, and landscape architects.
- Employer Identification Number (EIN): The EIN is a unique number required by the IRS for tax reporting purposes. Generally, a sole proprietorship only needs an EIN if it has employees. Although not always required, some banks might ask for an EIN to open a business bank account. If not, they’ll use the owner’s Social Security Number.
Related: Guide To Registering A Business In Montana
