Starting a business involves many steps, but one of the initial decisions you will have to make is choosing your business structure. A business structure defines the legal framework of your business, determining how it’s organized and taxed and how much risk you personally bear. It’s important to weigh the pros and cons of each type of entity before moving forward.
In this guide, we’ll explain what a sole proprietorship is, its advantages and disadvantages, and provide a step-by-step guide to registering your business. With the right information, you can make an informed decision about whether a sole proprietorship is the right structure for your business.
Related: New Mexico Business Startup Checklist
What is Sole Proprietorship?
A sole proprietorship is the simplest and most common business structure for small businesses and entrepreneurs. It’s not a separate legal entity but rather an extension of the individual owner. The business owner reports income and expenses on their personal tax return and has unlimited personal liability.
In addition to the sole proprietorship, there are three other business structures. These include:
- General partnership: In this structure, two or more people share the ownership of a business. They share the profits and are jointly responsible for any debts and obligations. Each partner is also liable for the actions of the other partners.
- Corporation: A corporation is treated as a separate legal entity from its owners. It can make profit, be taxed, and can be held legally responsible. This structure tends to be more complex to set up and manage.
- Limited Liability Company (LLC): This entity combines corporation and sole proprietorship/partnership structures. It offers the legal protection of personal assets that a corporation does (hence “limited liability”) while also providing the tax efficiencies and operational flexibility of a sole proprietorship or partnership.
These options have their own set of rules and requirements in terms of setup and operation.
Sole Proprietorship Advantages
In New Mexico, a significant number of small businesses choose to operate as sole proprietorships. But what makes it so appealing?
- Minimal paperwork: No formal registration with the state is required, which means you’ll do less paperwork than you would for other business structures.
- Costs: Becoming a sole proprietor involves the lowest costs compared to setting up a limited liability company or corporation.
- Tax simplicity: As a sole proprietor, you report your business income and expenses on your personal tax return, making the process more straightforward than it is for other structures.
Sole Proprietorship Disadvantages
While sole proprietorship has its benefits, it also has a few downsides that you should be aware of before making your decision:
- Unlimited personal liability: As a sole proprietor, you’re personally responsible for any debts or legal liabilities related to the business. This means your personal assets could be at risk if the business faces lawsuits or can’t pay back its debts.
- Difficulty raising capital: Raising funds can be more challenging for some sole proprietors in New Mexico. Since you can’t sell company shares, options for attracting investors are limited compared to a corporation or LLC.
- Potential tax disadvantages: While the tax process for sole proprietors is straightforward, it might lead to higher taxes. Sole proprietors pay income and self-employment taxes on business profits, which can be higher than corporations and LLCs
While a sole proprietorship is a good choice for many, if you’re concerned about personal liability and protecting your personal assets, consider forming a Limited Liability Company (LLC).
Related: How To Form A New Mexico LLC
Steps to Start a Sole Proprietorship in New Mexico
Setting up a sole proprietorship in New Mexico is quite simple, mainly because you’re not required to file any legal documents with the state government to get the business entity legally created. Still, some steps need to be followed to ensure your sole proprietorship is correctly set up. Let’s go through these steps:
Step 1: Choose a Business Name
As a sole proprietor in New Mexico, you can operate the business under either your full name or a specific business name. New Mexico has no registration requirements for businesses that use a DBA (Doing Business As) or trade name. So, within certain limits, you are free to choose any business name.
To avoid potential conflicts, you may want to check existing trademarks or register your business name with the US Patent & Trademark Office (USPTO).
Step 2: Research Business License Requirements
Obtaining the necessary business licenses is often necessary regardless of the business structure. The specifics, however, depend on the type of business you’re running and its location.
Local business license: While New Mexico doesn’t require a state business license, your local municipality might have license requirements. Consult your city officials or economic development office.
Combined Reporting System Number (CRS): All businesses in New Mexico must register with the New Mexico Taxation and Revenue Department for a Combined Reporting System (CRS) number. After registering through the Taxpayer Access Point, you will obtain a 10-digit tax identification number. This number is commonly used to report and pay the New Mexico Gross Receipts Tax and withholding taxes.
Professional licensing: Some professions in New Mexico are regulated and require registration before providing certain services. Examples include barbers, handyman services, interior designers, and recyclers.
Employer Identification Number (EIN): Required by the IRS for some businesses for tax reporting. Generally, a sole proprietorship needs an EIN only if it hires employees. Some banks also require an EIN to open a business bank account. Otherwise, you can use your social security number.
