Starting your own business in North Carolina? That’s a significant step, and choosing your business structure should be one of your first decisions. So, what’s a business structure? In simple terms, it’s the legal form your business takes. Among these, a sole proprietorship is a popular pick in North Carolina, especially for those venturing into business solo. It’s straightforward and uncomplicated, with one person owning and running everything.
But why is this decision so important at the start? Well, your choice shapes everything from your taxes to how much liability you take on. It’s your foundation, setting the stage for all the steps to follow in your business journey.
In this guide, you’ll get a clear picture of what a sole proprietorship is, including its pros and cons. We’ll also walk you through the steps to get your North Carolina sole proprietorship up and running.
Related: How to start a business in North Carolina
What is a sole proprietorship?
A sole proprietorship is basically you, the business owner, being the business. The business owner and the business are considered as the same entity for tax and legal purposes, which makes it a popular choice for small businesses.
In addition to the sole proprietorship, there are a few other common business structures.
- General partnership: Similar to a sole proprietorship, except two or more people own the business together.
- Corporation: A more complex structure, offering liability protection but with more formalities.
- LLC (Limited Liability Company): Combines features of corporations (liability protection) and sole proprietorships (easier to administer).
Sole Proprietorship Advantages
There are several reasons why sole proprietorships are common in North Carolina:
- Ease of setup: You and your business are one and the same. There is no need for formal registration and no complex paperwork – you can start your business straight away.
- Lowest startup costs: Sole proprietorships have the lowest startup costs of any business structure. You may need to register your business name and obtain licenses, but there are no formation fees.
- Minimal paperwork: This structure requires fewer ongoing reports compared to other business structures, meaning more time to deal with core business operations.
Sole Proprietorship Disadvantages
While simple and affordable, sole proprietorships do come with drawbacks to consider.
Unlimited personal liability: Since the business and the proprietor are considered the same entity, all debts and legal obligations of the business are the owner’s responsibilities.
Business continuity: The lifespan of a business is linked to the owner. In case of the owner’s death or the decision to stop the business, a proprietorship ceases operation. This is an important consideration for a business that relies on contracts with customers or vendors.
Potential tax disadvantages: While a proprietorship simplifies the tax filing process as profits are taxed as self-employment income, if the business is highly profitable, the proprietor may end up with higher personal income taxes.
Each business structure has its own pros and cons, so it’s essential to consider these factors carefully before making a decision. However, if protecting your personal assets is a priority, a Limited Liability Company (LLC) may be a better choice.
Related: How to form a North Carolina LLC
Steps to Start a Sole Proprietorship in North Carolina
Starting a sole proprietorship in North Carolina is a somewhat simple process since it doesn’t require filing any legal documents with the state government to create a business entity. Nonetheless, it’s important to check into a few things to make sure the business is set up correctly and legally.
Step 1: Come up with a Business Name
As a sole proprietor in North Carolina, you can operate your business under your full first and last name. However, if you prefer using a specific business name, registration is necessary. For instance, Jessica Smith wants to start a local bakery business and would like to operate under the name “Carolina Sweet Treats.” In this case, she’ll need to register her assumed business name (DBA) “Carolina Sweet Treats.”
Step 2: Verify Name Availability
Before registering your business name, you need to check and make sure it’s not already in use. You can do this through a name search on the North Carolina Secretary of State’s website.
Related: How to search available business names in North Carolina
Step 3: File the Assumed Business Name Form
If you want to operate under a specific business name, you’ll need to register it. The Assumed Business Name Certificate form (ABN) can be obtained from the North Carolina Secretary of State, Corporations Division.
Related: How to register a North Carolina assumed business name
Note that registering an assumed name in North Carolina won’t prevent a business in another state from using the same name. To obtain stronger legal rights to your business name, consider applying for a federal trademark through the U.S. Patent & Trademark Office (USPTO).
Step 4: Research Business License Requirements
Business licensing and registration requirements are often similar across different business structures but may vary depending on the nature of your business and its location. A few common registrations include:
- Local business license: While there isn’t a state business license, your city or county may require a local business license. Check with your local officials or the economic development office for more information.
- Sales & use tax number: If your business involves selling physical products, some digital products, providing certain services, or renting property, register for a Sales & Use Tax Number (also called a Seller’s Permit) from the North Carolina Department of Revenue.
- Professional license: Some industries and professions are regulated in North Carolina and require special registration before offering certain services. Among the common occupations requiring licensing in the state are commercial fishermen, firearms trainers, and fur dealers.
- Employer Identification Number (EIN): The EIN is a unique number the IRS requires for some businesses for tax reporting purposes. Generally, a sole proprietorship only needs an EIN if it hires employees. Although not always mandatory, some banks may require an EIN to open a business bank account.
Related: What business licenses are needed in North Carolina
Wrapping Up
With minimal paperwork and low costs, the sole proprietorship is a popular business structure in North Carolina. Understanding the necessary steps, from naming your business to obtaining required licenses, will set you up for success as you begin your entrepreneurial journey.
So, which business structure are you leaning toward, and why did you make that choice? We’re eager to hear from you. Also, feel free to ask any questions in the comment section.