Sole proprietorship is the business structure which requires least amount of money and compliances in its set-up and yet brings lots of tax perks with it. It is one of the simplest ways of structuring your business and allows the owner of the business to legally have full control over it.
Let me illustrate your journey of starting your own sole proprietorship business in Wisconsin step by step:
- Develop an idea – You need to come up with the basic idea of your business concerning what product or service you are going to provide to your customers.
In order to reach that conclusion, you need to research on what people of Wisconsin or your local area really need and what is the best way to fulfill their needs.
You need to mold your business idea according to its target market and to beat the competition. It’s advisable to choose a product or service that would face least competition from other businesses. - Draft a business plan – It is crucial that you plan your business exhaustively before rolling out your products or services.
You need to plan your business description, business funding, marketing strategies and set-up beforehand. Do not leave anything for the last minute. - Choose a trade name – In sole proprietorship, the owner of the business and the business entity are one and the same for most of the purposes. In Wisconsin, you get an option to run the sole proprietorship business on your personal name or a trade name.
By choosing a powerful trade name, you imply to the customers that it is a separate entity and make the name resonate with the kind of product or services that you provide.
You should be careful in choosing your trade name since the Wisconsin State requires you to choose a name that is distinguishable from other companies/businesses that are already on its record. You can visit the website of Wisconsin Department of Financial Institutions to check if the name is distinguishable from other businesses.
It is also advisable to do a trademark search on USPTO website beforehand and choose a name which is not very similar to any other trademark name. - Register the trade name – Though it is not mandatory, you can register your trade name with the County Register of Deeds in the county where the principal office of your business is located. It would require a fee of $30.
It is recommended that you should also register your trade name with the Wisconsin Department of Financial Institutions at a nominal fee of $15. It protects your name as a trademark and builds trust and credibility in the market for your trade name. - Obtain licenses and permits – Wisconsin State does not require a general business license for sole proprietorship. The requirement of permits and licenses depends upon the kind of goods and services that you provide.
You can look up to the Wisconsin Licensing, Permit and Registration Service website to check what kind of licenses and permits you require from the State for your kind of products, services and business.
Additionally, you might also be required to obtain license, permits and zone clearances form your local authorities. You need to check with your county and city governments to know about them. - Obtain Employer Identification Number – As I already said, in sole proprietorship, the owner and business are one and the same especially for tax purposes. Therefore, you don’t need a separate federal tax ID for your proprietorship. You can pay its taxes using your own Social Security Number (SSN).
But in Wisconsin, you are required to have an Employer Identification Number (EIN) if you have any employees in your business. You need to report wages to the Internal Revenue Service (IRS) using your EIN.
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.
You can easily obtain your EIN by applying at the Internal Revenue Service (IRS) website. It is a nine-digit number and available free of charge immediately through online application. - Taxation requirements – Your sole proprietorship might be required to pay sales and use taxes depending upon the products and services that you provide. You need to check the Wisconsin Department of Revenue website to know what taxes apply on your kind of business.
Apart from that, you need to file tax return on Form 1040. You need to carefully calculate profits and losses of your business according to IRS Schedule C. You need to include all the applicable deductions according to Schedule C so that your taxable income remains minimum.
Since it is included in the owner’s personal income tax payment, it will be taxable on the same rate as that for individual (owner).
The owner also needs to pay self-employment tax computed on the taxable income of the business which provides social security/medicare benefits.
Important note: Since the sole proprietor is not an employee, no income tax is withheld from their pay. Therefore, IRS requires that the estimated tax should be paid quarterly and not altogether at the end of year. If at all, it is paid only at the end of the year, interest and penalties would be applicable on such amount. If you want to avoid that, pay your taxes quarterly. - Open business bank account – You should open a separate business bank account in the name of your sole proprietorship using your EIN.
It helps keeping your personal and business account separate making it easy to compute taxes on them separately. Otherwise, if you mix up your personal and business incomes, it would be a trouble computing tax on the business income and self-employment tax. - Obtain general liability insurance – Insurance is crucial for every kind of business but for a sole proprietorship, you would definitely want to take one.
Why? Because the owner (individual) and the business don’t have separate legal existence. Any liability (risk) faced by one is part and parcel of another.
Since the owner is personally liable for all the debts and liabilities of the business, it is advisable to take a general liability insurance to tackle unforeseen events.
Indeed, sole proprietorship is the simplest business structure available and Wisconsin has made it easier with online hassle-free compliances and registrations. It is not mandatory to officially register your business with the State to get started.
Yet it is advisable to take the above-mentioned steps to keep your business safe – both legally as well as financially. Precaution is better than cure so that you can run your business smooth and nice without any worries.