How to Become a New Jersey Sole Proprietorship

It is important to understand that choosing the right legal structure for your business is a crucial step in planning the development of your business. It decides what compliances you need to follow and what benefits and risks you might be facing. 

A sole proprietorship has a single owner who possesses complete control and responsibility for bonafide operation of the business. Since the entire profit goes into the hands of the proprietor, he or she is also personally liable and accountable for every aspect of the business.

It is so because the sole proprietorship does not have a separate legal existence from that of its owner. It is ideally suited to the businesses where the nature of the business is simple without a large requirement of human capital and the financial risk is minimal. 

A sole proprietorship is indeed an easier structure than the other available options and it can be easily established in New Jersey by following few important steps:

  1. Choose a business name – A sole proprietor has the option of running the business under his own name or a trade name. A trade name makes the business look separate from the owner and builds credibility in the market.

    If you choose to use a trade name for your business, New Jersey law requires that it should be distinguishable from the name of any other business entity registered on the records of the State. In order to search the availability of the business name that you desire, you can visit the New Jersey State website and use online Name Availability Look-Up Service.

    It would also be prudent to check the US Patent and Trademark Office (USPTO) website for any similar trademark because the federal law does not allow you to infringe upon someone else's trademark.

    If you are going to have a website of your own, you should also do a domain name search on the GoDaddy website.
  1. Register a business name – If you choose to operate your business under a business name (trade name), New Jersey requires you to register that name with the county clerk in the county in which the principal office of your business is located.

    You can also register your trademark in case you want to protect it from infringement in other States. It is not a mandatory requirement. Similarly, you may choose to register your domain name on the GoDaddy website.

  2. Obtain licenses/permits - According to the nature of your business, you may need to obtain some business licenses or professional licenses. To know what license or permit you might need for your business or your employees might need for working with you, you should check the New Jersey business website. 

    You might also need to obtain licenses, building permits and zoning clearances for your business according to the local regulations. You should check with your city or county government for information on these licenses and permits.
  3. Obtain EIN – Employer Identification Number is a nine-digit number issued by the Internal Revenue Service (IRS) and is available free of charge. It is mandatory only if you have employees in your business. If you have employees, you need to report wages to the IRS using your EIN. 

    You can easily obtain EIN by applying at the Internal Revenue Service website. The owners also take EIN for privacy reasons and because some banks require an EIN to open a separate bank account in the name of your proprietorship. It also reduces the risk of identity theft. 

    The law requires you to inform the IRS and the State of New Jersey whenever you hire new employees in New Jersey. If you have employees in New Jersey, you should also obtain workers’ compensation insurance. You can check the New Jersey Labor Department website to know more about this insurance. 
  4. Understand the tax requirements - As already mentioned, the identity of the owner and the sole proprietorship is one and the same and the owner does not need to obtain a federal tax ID – Employer Identification Number (EIN) for complying with tax requirements. The proprietor can use his/her own Social Security Number (SSN) to report taxes of the proprietorship.

    In New Jersey, you are required to register with the New Jersey Division of Revenue in order to comply with all the taxes and submit employee reports. You may register your business on the website itself by filling the NJ-REG form online. 

    After you register your business, you are informed of your tax and other necessary compliances through regular notifications. Therefore, it is an important step in your business.
  5. Open business bank account – It is advisable to keep your business finance separate from your personal finance. Therefore, you should open a separate business bank account where you can keep all the finances of your business.

    Opening a bank account for your business might require your EIN. It helps keeping a clear account of your business’ income and expenses.
  6. Obtain general liability insurance – Business insurance is often ignored in the steps for establishing your business but it is a very crucial step for the long survival of your business. 

    In case of sole proprietorship, it is even more important since the liabilities and responsibilities of the business are completely on the shoulders of the proprietor. The owner is personally liable for all the debts and liabilities of the business. Therefore, it is recommended that you take a general liability insurance to protect your business as well as your own finances.

Once you follow these steps carefully enough, it makes the future of your sole proprietorship safe and secure. 

The critical point to remember is that the proprietor (you) is personally liable for everything that happens with your business. You must be careful to follow all the compliances otherwise your personal savings and property might be in danger.

If you can keep your financial risk to a minimum, this structure might prove beneficial for your business. Once the business is big enough, you may opt to switch to other legal structures.