When starting your first business, an early decision involves selecting a business structure which defines your company’s legal and tax framework. Among the options available, a sole proprietorship stands out for its simplicity and direct connection between the business and the owner.
Sole proprietorships are a popular business structure in Rhode Island. This guide provides an overview of the sole proprietorship and a step-by-step guide on registering it to help you understand whether it’s the right structure for your business.
Related: Rhode Island Business Startup Checklist
What is a Sole Proprietorship?
A sole proprietorship is a business owned and operated by a single individual, with no distinction between the owner and the business entity. This structure has no legal separation between the business’s finances and your personal finances. This means that all the profits, losses, and assets of the business are directly yours. In Rhode Island, sole proprietorships represent a significant portion of businesses, largely due to their simplicity and flexibility.
Other business structures include:
- General partnership: A business owned by two or more people who share profits and responsibilities.
- Corporation: A more complex structure offering liability protection to its owners.
- Limited Liability Company (LLC): Combines a sole proprietorship’s simplicity with a corporation’s liability protection.
Related: Business Structure Overview
Sole Proprietorship Advantages
There are several advantages to starting a sole proprietorship in Rhode Island. Here are three key benefits:
- Ease of setup: Sole proprietorships are incredibly easy to start in Rhode Island. There’s no formal registration process or the need for formation documents, which means you can start your business quickly.
- Total control: As a sole proprietor, you have complete control over all business decisions. This means you don’t have to consider partners or shareholders when making decisions.
- Tax simplicity: Your business profits or losses are reported on your personal tax returns. This process is straightforward, as you don’t need to file separate business tax returns.
Sole Proprietorship Disadvantages
Despite its advantages, a sole proprietorship comes with certain drawbacks. Let’s examine three key disadvantages:
- Personal liability: There’s no legal distinction between you and your business, so your personal assets are at risk if your business faces legal or financial trouble.
- Potential tax disadvantages: While tax filing is simpler, sole proprietors pay self-employment taxes on top of their regular income taxes, which can sometimes be higher than the taxes of a corporation or LLC.
- Less business continuity: The business ends when the owner decides to stop or passes away, which may disrupt contracts with customers or vendors.
While a sole proprietorship offers simplicity and direct control, it also comes with more personal risk. If you’re concerned about personal liability, consider forming a Limited Liability Company (LLC) in Rhode Island. An LLC provides a layer of protection for your personal assets while maintaining operational simplicity like a sole proprietorship.
Related: How To Form A Rhode Island LLC
Steps to Start a Sole Proprietorship in Rhode Island
Starting a sole proprietorship in Rhode Island only requires a few steps to make sure the business is legally compliant. Follow these key steps to get up and running:
Step 1: Come up with a business name
In Rhode Island, a sole proprietor can choose to operate under their own personal name. However, if they prefer a unique business name, it must be registered. For instance, if Mariana Silva wishes to open a seafood restaurant, and instead of operating under her name, she wants to use “Ocean Delights.” In this case, Mariana must register the business name “Ocean Delights.”
Step 2: File a Trade Name Certificate
To register a specific business name in Rhode Island, you must obtain a Trade Name Certificate from your local City or Town Clerk’s office. Most Clerk’s offices have this form on their websites.
Related: How To Register A Rhode Island Trade Name
It’s useful to note that registering your assumed name in Rhode Island doesn’t prevent others from using the same name. If you want exclusive rights to your chosen name, consider applying for a trademark through the U.S. Patent & Trademark Office (USPTO).
Step 3: Research Business License Requirements
In Rhode Island, the specific licenses and permits you need depend on what your business does and where it’s located. Some common registrations include:
- Local business license: While no statewide business license exists, your city may require a local business license. Check with your city officials or economic development office for more information.
- Sales tax permit: If you’re selling tangible personal property, you need a Rhode Island sales tax permit from the Rhode Island Division of Taxation.
- Professional license: Certain professions are regulated and require registration. Examples include accountants, landscapers, auto body repair, and brewpubs.
- Employer Identification Number (EIN): If your sole proprietorship will hire employees, you need to obtain an EIN from the Internal Revenue Service (IRS). Some banks also ask for an EIN while opening a small business bank account. If you don’t need an EIN, you can use your social security number.
