Starting your first business is a significant step, and choosing the right business structure is one of the first decisions you’ll face. The business structure defines the legal and tax treatment of your company, outlining your liability protections, how profits and losses flow through to your personal tax return, and the ongoing regulations and paperwork required.
The sole proprietorship is a popular choice for business structure in Washington. This guide aims to help you understand if it’s the right structure for you. We will explain what a sole proprietorship is, what its advantages and disadvantages are, and offer a step-by-step guide on getting registered in Washington.
Related: How to start a business in Washington
What is a sole proprietorship?
A sole proprietorship is a business entity where there is only one owner who manages all the business decisions and is responsible for all liabilities. There’s no legal separation between the owner and the business. This means that all profits and losses of the business directly affect the owner’s personal finances. People often choose a sole proprietorship because it’s simple to start and run. The profits are taxed as personal income, which can simplify the tax process. However, the owner also faces unlimited liability, meaning personal assets could be at risk if the business runs into debt or legal issues.
Here’s a quick look at other business structures:
- General partnership: Like a sole proprietorship, but is owned by two or more people, sharing profits, losses, and management.
- Corporation: A more complex structure that is a separate legal entity from its owners, offering limited liability protection.
- LLC (Limited Liability Company): Offers the benefits of both a corporation and a sole proprietorship or partnership, providing flexibility and limited liability.
Sole Proprietorship Advantages
- Ease of setup: makes the sole proprietorship an attractive option in Washington. You don’t need to file legal documents with the state to create a sole proprietorship entity, making the process straightforward.
- Lowest startup costs: With no formal registration requirements, a sole proprietorship has very minimal startup costs. You may need to register a business name and obtain necessary licenses and permits (which would be the same regardless of business structure).
- Tax simplicity: In Washington, sole proprietors report their business income on their personal tax returns. This simplifies the tax filing process as it doesn’t require separate corporate tax filings.
Sole Proprietorship Disadvantages
- Unlimited personal liability is a significant disadvantage. As a Washington sole proprietor, your personal assets, like your home and savings, could be at risk if your business faces debt or legal issues.
- Less business continuity: Another downside is that a sole proprietorship doesn’t continue independently if the owner dies or decides to close the business. This can affect long-term contracts with customers or vendors.
- Potential tax disadvantages: While the tax filing process is simpler for sole proprietors, they sometimes face potential tax disadvantages, such as paying income and self-employment taxes on business profits, which might be higher than those for other business structures.
If liability protection is a concern for you, forming a Limited Liability Company (LLC) could be a better choice. An LLC provides business owners with limited liability protection, which safeguards your personal assets in case your business faces legal issues.
Related: How to form a Washington LLC
Steps to Start a Sole Proprietorship in Washington
Starting a sole proprietorship in Washington involves a few steps to make sure your business is legally set up. Even though a sole proprietorship does not require formal business formation documents, it’s still necessary to address a few various registrations.
Step 1: Choose a Business Name
In Washington, a sole proprietor can operate under their full name. However, if you prefer a specific business name, you must register it under Washington Statutes 19.80.1
For example, imagine Sarah Johnson starting a specialty coffee shop. Instead of operating under her name, she chooses “Brewed Awakenings.” She’ll need to register this name as her Doing Business As (DBA).
Step 2: Verify Name Availability
Before registering your business name, verify it is available for use in Washington. You can search the Washington Secretary of State website to see if another business is using your desired name.
Related: How to search available business names in Washington
Step 3: Register the Trade Name
So, you’ve got your unique business name, what’s next? You’ll have to officially register it. To legally register a business name, you’ll register it as a Trade Name with the Washington Department of Revenue through a Business License Application.
Registering a name in Washington doesn’t prevent others in different states from using it. For exclusive rights, consider applying for a trademark with the U.S. Patent & Trademark Office (USPTO).
Step 4: Research Business License Requirements
It’s important to understand the kind of licensing and registration your business requires, which may vary based on your business’s nature and locale.
Washington State business license: If your business fits any of these descriptions, you’ll need a business license:
- Earns more than $12,000 per year
- Operates under a name different from the owner’s full legal name
- Plans to hire employees within the next 90 days
- Sells a product or provides a taxable service
- Has specialty licenses available through the Business Licensing Service
- You can apply for your business license via the State of Washington Business Licensing Service.
Local business license: In addition to the state business license, a local license may also be necessary. Visit your city officials or economic development office for more details.
Business tax number. If you’re selling a product or offering specific services, you’ll need a Washington sales tax registration number. This can be obtained from the Washington Department of Revenue.
Professional license: Some professions in the state are regulated and must be registered, such as appraisers, cosmetologists, home inspectors, limousine services, tattoo studios, and more. Check out the Washington State Department of Licensing for further details.
Employer Identification Number (EIN): While not always necessary for sole proprietorships, an EIN is required by the Internal Revenue Service (IRS) if you plan to hire employees. It might also be needed to open a business bank account. Otherwise, your social security number can be used.
Related: What business licenses are needed in Washington?
Wrapping Up
Starting a business is a significant step with an assortment of choices to consider. Understanding and choosing the right structure, like a sole proprietorship in Washington, is a start to managing your legal obligations and setting up for success.
We’re eager to hear about your small business journey. Please share with us in the comments which business entity you are leaning towards and why. If you have any burning questions or need additional clarification on starting a sole proprietorship in Washington, feel free to ask.
