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A sole proprietor – someone who owns an unincorporated business by themselves – must take certain actions if they want to close their business. They must file final forms and schedules whether they’ve been in business a few months or many years. Here’s information on typical final forms and schedules that a sole proprietor needs to file when ceasing operations.
Income tax returns
Sole proprietors must file Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business, with their Form 1040, U.S. Individual Income Tax Return, or Form 1040-SR, U.S. Tax Return for Seniors, for the year in which they go out of business. Also, with their Forms 1040, sole proprietors may need to file:
- Form 4797, Sales of Business Property, if they sell or exchange property used in their business. They also need to file this form if business use of certain Section 179 or listed property drops to 50% or less.
- Form 8594, Asset Acquisition Statement, if they sell their business.
- Schedule SE (Form 1040), if they’re liable for self-employment tax.
Sole proprietors with one or more employees must make final federal tax deposits. If sole proprietors don’t withhold or deposit income, Social Security and Medicare taxes, the Trust Fund Recovery Penalty may apply. The penalty is the full amount of the unpaid trust fund tax. The IRS may impose it on all persons who the Service determines is responsible for collecting, accounting for and paying these taxes; and who acted willfully in not doing so. A responsible person can be an employee of a sole proprietorship, an accountant or someone who signs checks for the sole proprietorship or has authority to cause the spending of business funds.
Sole proprietors need to file Form 941, Employer’s Quarterly Federal Tax Return (or Form 944, Employer’s Annual Federal Tax Return), for the calendar quarter in which they make final wage payments. They check the box and enter the date final wages were paid on line 17 of Form 941 or line 14 of Form 944. They must attach a statement to their return showing the name of the person keeping the payroll records and the address where those records will be kept.
Sole proprietors must file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, for the calendar year in which final wages were paid. They need to check box d in the Type of Return section to show that the form is final.
Sole proprietors also need to provide Forms W-2, Wage and Tax Statement, to their employees for the calendar year in which they make final wage payments. Generally, they furnish copies B, C and 2 to the employees. They file Form W-3, Transmittal of Income and Tax Statements, to transmit Copy A to the Social Security Administration.
Reporting due dates
Visit IRS.gov for information on employment tax due dates.
Other reporting for sole proprietorships with employees
If employees receive tips, the sole proprietor must file Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, to report final tip income and allocated tips.
If the sole proprietor provides employees with a pension or benefit plan, they need to file a final Form 5500, Annual Return/Report of Employee Benefit Plan.
Sole proprietorships that pay contract workers
Sole proprietors report payments to contract workers who they’ve paid at least $600 for services (including parts and materials) during the calendar year in which they go out of business on Form 1099-NEC, Nonemployee Compensation.
Some filers must file Forms 1099 electronically. Those who file paper forms must also file Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to transmit paper copies of Forms 1099 to the IRS.
How long a business owner should keep a document depends on several factors. These factors include the action, expense and event recorded in the document. Businesses should keep records relating to property until the period of limitations expires for the year in which they dispose of the property in a taxable disposition.
Business owners should keep all records of employment taxes for at least four years.
Employer identification numbers
Once the IRS has assigned an employer identification number to a sole proprietor, it becomes the permanent federal taxpayer identification number for that business. To close their business account, a sole proprietor needs to send the IRS a letter that includes the complete legal name of their business, the EIN, the business address and the reason they wish to close their account. If they have a copy of the notice that the IRS issued with the EIN assignment, they should include that with the letter. They should write to the IRS at: Internal Revenue Service, Cincinnati, Ohio 45999.
Sole proprietors who:
- made a federal tax deposit or other federal tax payment,
- are liable for any business taxes, or
- are notified by the IRS that a business tax return is due,
must file the appropriate tax returns before the IRS can close their account.
As a sole proprietor, you’re personally liable if the business gets sued or incurs debts.
Sole proprietors must report business profits as personal income, and pay self-employment tax.
Difficulties raising capital
It’s harder to attract investors because you have no partners, shares, or membership interests.
How you can build your business
DBA (doing business as)
Use a name other than your own to do business, open a bank account, and build a brand.
Make sure you have all required permits and licenses to run your business legally.
Operate as an LLC to protect your personal assets if your business ever gets sued or incurs debts.
Subscribe to a Business Advisory Plan, and get help from a network attorney.
Do I need to use my own name for my sole proprietorship, or can I run the business under another name?
As a sole proprietor, by default, the legal name of your business is your own name. But you can choose to operate the business under another name, known as a “fictitious business name” or “doing business as” (DBA). Most states require you to file an application for your DBA.
Do I need to register my sole proprietorship with the government?
You don’t have to register or file any paperwork with the federal government to form a sole proprietorship. If you go into business without setting up another business structure, then you’re automatically considered a sole proprietor if you’re the sole owner.
However, some states and counties may require you to obtain business licenses and/or permits before you can lawfully operate, Also, if you want your business to have a name that’s different from your own legal name, then most states will require you to file for a DBA.
Can I open a business bank account with a sole proprietorship?
Even if your business is a sole proprietorship, you should have a separate business bank account to help separate your business and personal income and expenses. This will help you properly report your business income on your personal tax returns. Most banks will allow you to open an account for your sole proprietorship using your social security number.
If you plan on doing business under a fictitious name (“DBA”), most banks will require proof of the filed DBA before they will open the account.
If my business grows, can I change my sole proprietorship into a corporation or LLC?
You can always choose to restructure your business. Whenever you decide your business might be outgrowing its status as a sole proprietorshipвЂ“whether you’re looking to take on partners or investors, or you want the benefit of different tax options and liability protectionвЂ“we have resources to help you find the business structure that’s right for you.
Do I need an EIN (tax ID) if I file a DBA?
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Table of Contents
1. What is a sole proprietorship?
A sole proprietorship is an unincorporated business that is owned by one person. If the business has multiple members, it’s considered a partnership.
Unincorporated means that the business has no legal separation between the owner and the company. The government treats the business the same as the owner in terms of liability.
If the owners of a business want to raise capital from investors or get legal protection, they need to form an LLC or a Corporation.
2. How to Form a Sole Proprietorship in Ohio?
Sole proprietors might need to register for two things in Ohio: business names and taxes.
If the business uses the owner’s name (Bob Smith Catering), the business does not need to register the business name.
When you register your business name, it doesn’t give you the exclusive right to the name. If you want the exclusive right to a name, you need to trademark it.
3. Business Names in Ohio
Here are some different terms you might hear regarding business names.
- Fictitious Name: A name used in business or trade that the user has not registered as a trade name or is not entitled to register as a trade name. Registration of a fictitious name does not give the user any exclusive right to use the name.
- Trade Name: A name used in business or trade to designate the business of the user. Registration of a trade name gives the registrant exclusive use of the name. This is the equivalent of a “Business Legal Name” in other states.
- Trademarks: Any word, name, symbol, device, or combination of any word, name, symbol or device, that is adopted and used by a person to identify and distinguish the goods of that person, including a unique product, from the goods of other persons, and to indicate the source of the goods, even if that source is unknown.
- Service Marks: Any word, name, symbol, device, or combination of any word, name, symbol or device, that is adopted and used by a person to identify and distinguish the services of that person, including a unique service, from the services of other persons, and to indicate the source of the services, even if that source is unknown.
The business name cannot contain a corporate suffix (LLC, Inc., Corp, etc.) and cannot contain a prohibited word (this list is for Michigan but is applicable to other states).
4. Sole Proprietorship Taxes in Ohio
Any income made by the business is passed to the sole proprietor to be paid as self-employment personal income tax. The business owner will need to pay state income tax and federal income tax.
If the business sells items that require sales tax, the business needs to set up a tax account with the Ohio Department of Revenue.
Some cities might require a sole proprietor to obtain a business permit. Certain industries will require additional permits (restaurants, alcohol/tobacco, gambling). You should check each your town’s website to see what permits are required.
- How To Guides
- How to File a DBA
- How to File a DBA in Ohio
Filing an Ohio DBA, also known as a trade name, is a simple legal process that you complete with the Ohio Secretary of State.
Follow the steps below to complete your Ohio Trade Name Registration.
Our How to File a DBA in Ohio guide will help you get started on branding your small business.
A DBA is used for branding purposes. A DBA isn’t a type of business structure and won’t protect your personal assets.
Forming an LLC is the best choice for most small businesses. Visit our DBA vs LLC guide to learn what types of businesses need limited liability protection.
How To Use This Guide
Use our free guide below to file for a DBA in Ohio:
Use A Professional Service
A professional service will handle filing your Ohio DBA, allowing you to focus on the other needs of your new business.
MyCompanyWorks ($99 + state fee) for a personalized DBA service.
Swyft Filings ($99 + state fee)
How To Set up a DBA in Ohio
Step 1: Start With an Ohio DBA Business Name Search
First, note that there is a difference between a “trade name” and a “fictitious” business name in Ohio. Trade names must be distinguishable from other business names, while fictitious names don’t have to be.
Because of this, trade names are protected by the state from being used by other businesses in that state. Fictitious names are not. This guide will focus on Ohio Trade Name Registration.
If you haven’t already, head over to the Ohio Secretary of State website to make sure your trade name isn’t taken by another registered Ohio business. Your name can be similar to other business names, but it’s still a good practice to create a unique name.
TIP: Our business name generator tool is a great resource for entrepreneurs who are still working to create the perfect business name or website address. You can also use our free logo generator tool to make a logo yourself! No design experience necessary!
In Ohio, your trade name should not include:
- Any business entity suffix, such as LLC, Incorporated, Corp., etc unless the business is actually an LLC, corporation, or etc.
- Any terms given to financial institutions, including: “bank,” “banc,” “banco,” “banque,” “banker, “trust company,” “savings and loan association,” “savings bank,” “credit union” or other similar words.
You can read more about Ohio business name guidelines here.
Next, a quick search on the U.S. Trademark Electronic Search System will tell you whether someone else has already trademarked your business name.
Now would be the perfect time to make sure there’s a web domain available for your DBA as well.
Created byВ FindLaw’s team of legal writers and editors | Last updated February 16, 2018
In its simplest form, a sole proprietorship is just a one-person business that doesn’t have to be registered with the state, unlike a limited liability company (LLC) or a corporation. It is by-far the easiest business structure to set up and maintain. If you are running your own one-person business, then you may already be operating as a sole proprietorship without even knowing it.
Indeed, there are some situations when people automatically set up a sole proprietorship, even without paperwork. Some examples include freelance photographers, a person who builds cabinets on a contract basis, and even salespeople that work solely on commission. Just because you may have already set up a sole proprietorship, however, does not mean that there’s nothing else you need to do. Below are some suggestions for how to set up a sole proprietorship.
Setting Up a Sole Proprietorship: At a Glance
Some states have laws mandating that sole proprietorships register and get business licenses. In addition, you should also make sure that you have all the required permits that allow you to perform your duties. It’s also important to realize that you should not try to use your business as a tax shelter or some other loophole, as any profits that your business sees will translate to you as income for your personal tax return. By extension, if your business owes any debts, you owe those debts, and creditors can come after your personal assets if your business can’t afford to pay.
No Limited Liability
Unlike a corporation or LLC, owners of sole proprietorships do not enjoy the comforts and security provided by limited liability. Because of this, if there is a judgment or debt owed by your company, the creditor or judgment seeker can come after you and your personal assets just as easily as they can go after the assets of your company. In other words, if you make a blunder on the job as a sole proprietor, it could cost you your bank accounts and/or your home.
To clearly see this point, it is helpful to look at some examples:
Suppose that Manny owns and operates a machine shop in his home garage.
With the construction of a custom car shop in Manny’s hometown, he has recently run into many more orders than he has ever had before. Because of this, he decides to order a new lathe to make custom exhaust pipes for the cars that the car shop builds. He finances the $100,000 piece of equipment through the seller and makes regular payments for two months before the custom car shop closes its doors. As a sole proprietor, Manny is personally liable for the business debts of his company. After the company repossesses the lathe, they still demand $20,000 for the reduction in value because the lathe was used. The lathe company can seek this money from Manny’s personal assets, such as his car or even his home.
Now suppose that Manny has one employee in his shop that not only helps him make the exhaust pipes, but also delivered them to the, now closed, custom car shop. One day while driving over two new exhaust pipes in the company truck, Manny’s employee hits another car, causing damage to the car and injuries to the other car’s driver. The driver sues the employee and Manny’s company, and the court rules that a $200,000 settlement is in order. Manny’s insurance will only cover $150,000 of the claim, leaving Manny personally liable for $50,000, which could be taken from any of his personal assets (with a few exceptions).
As noted above, sole proprietorships do not provide owners with any form of limited liability. If Manny had organized his company as an LLC or a corporation, he could have enjoyed limited personal liability. Both the creditor and the injured driver would only be able to seek money from the assets of the company, not from Manny himself. This is why it makes sense to form you business as an LLC or corporation if you foresee that your business will be engaged in a dangerous activity, or if you have personal assets that you want to protect from potential liability.
Taxes and Sole Proprietorships
Unlike a corporation, which is its own tax entity, a sole proprietorship does not pay taxes as a business. Instead, because the business and the owner of the business are one and the same, the taxes “pass through” the business to the owner. This means that all business profits and losses are reported on the owner’s tax return.
If you do set up a sole proprietorship, you will have to be responsible for paying your taxes by yourself. This means that not only should you self-withhold taxes for the IRS and the state that you live in, but you also must pay taxes for social security and Medicare. You will need to engage in a “self-employment tax.” You should visit the Internal Revenue Service at http://www.irs.gov to find out more about this tax.
Sole Proprietorship Registration
As an owner of a sole proprietorship, you will probably not have to go through the same process of registering as an LLC or a corporation. When you start your new business, you will simply declare that you are running a sole proprietorship instead of filing paperwork with the state creating a corporation.
Almost every city and county in the nation requires that any business, even a sole proprietorship, register and pay at least a small tax, however. In return for this tax and registration, your business will receive a business license and tax registration certificate. In addition to these documents, you should also go about getting a federal employer identification number from the Internal Revenue Service (so you can withhold taxes from your employees), a license to sell from your state, and a zoning permit from your local land planning board if it is required.
Also, if you plan on doing business under a name other than your own legal name, you will probably be required to register that name as a “fictitious business name” with your local county or state government.
Get Legal Help Setting Up Your Sole Proprietorship
Although it’s relatively easy to set up a sole proprietorship without the assistance of an attorney, you may still have some questions about liability, taxes, and other possible risks. You should speak with a business organizations attorney in your area to help answer your additional questions and guide you through the process of setting your business up.
Advantages and Disadvantages of Sole Proprietorship
Most small businesses are sole proprietorships because they’re the easiest and least expensive way to start a business. In fact, the IRS reports that over 25.5 million businesses paid taxes as sole proprietors by filing Schedule C of Form 1040 in 2016 (the last year calculated).
What is a Sole Proprietorship?
The sole proprietorship is the oldest and simplest form of business ownership. A sole proprietorship (or “sole prop”) is a form of business in which an individual starts a business under his or her own name. It’s a one-person business; your business can’t be a sole proprietorship if it has more than one owner. In a sole proprietorship, you are the business in a sole proprietorship. The business isn’t a separate entity from you.
The IRS calls a sole proprietor someone who owns an “unincorporated business by himself or herself.” That means the business isn’t a corporation (or S corporation) or a single-owner limited liability company (LLC).
Many sole proprietors work from home. This article on Starting a Home Based Business answers commonly asked questions about the additional requirements for starting your sole proprietorship from home.
How Does a Sole Proprietorship Get Started?
A sole proprietorship is unique because it’s the only business that doesn’t have to register with a state. All other business types – partnerships, limited liability companies, and corporations – must file a registration form with each state in which they do business.
Starting a sole prop business is fairly simple. To start a sole proprietorship, all you need to do is:
- Create a business name and decide on a location for your business
- File for a business license with your city or county, and get permission from your locality if you want to operate your business from home.
- Set up a business checking account so you don’t mix up business and personal spending.
In addition, your sole proprietorship may have to register with federal or state entities (these registrations are the same for all types of businesses):
- If you plan to sell taxable products or services, you must register with your state’s taxing authority.
- If you plan to hire employees, you’ll need an Employer Tax ID Number (EIN) from the IRS. Your bank may also require this tax number.
Advantages of a Sole Proprietorship
Forming a sole proprietorship offers several advantages.
You don’t have to prepare any legal agreements because you’re not in business with someone else, and you don’t have to set up an elaborate business structure: no board of directors, no meetings, no minutes, no complicated accounting for shares in the business. You just start running your business.
You have complete control over all the operations and you get to make all the decisions as the sole owner of the business. You don’t need a board of directors or shareholders, and you won’t have other owners to answer to.
Tax Preparation and Filing
Sole proprietorship income taxes are easy to file, using Schedule C and adding the income/loss from the business to your other income on your personal tax return.
Use of Losses
You can use any business losses to offset personal income from other sources (a spouse’s salary, for example), because you’re including your sole proprietorship income/loss on your personal tax return.
You must actively participate in the business and not be just an investor to take the maximum loss. You also have to be careful not to run up against the IRS restrictions on “hobby” businesses which generate losses for years. Losses can lower your taxes if you can prove your business is legitimate and not a hobby.
See this article about Claiming Business Losses on your Tax Return to learn more about limits to business losses.
Disadvantages of a Sole Proprietorship
The primary disadvantage of a sole proprietorship is that your personal finances and those of your business are one and the same. You’re personally liable for any debts or obligations of the business when you’re the owner. Lawsuits or creditors may be able to access your personal accounts, assets, or property if your business can’t pay its bills.
You can’t file bankruptcy for your business without filing personal bankruptcy. Filing bankruptcy for your sole proprietorship means involving your personal assets. A bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners and debtors.
The issues of personal liability and involvement of personal assets outweigh the advantages of sole proprietorship structure for many businesspersons. Consider forming a limited liability company (LLC) or corporation instead if this is the case for you.
Getting Business Insurance Protection
You can’t protect your personal assets if your business is in trouble financially, but you can have some protection from liability lawsuits if you get property and liability insurance. You’ll probably have to get this insurance specifically for your business, but it can help protect you if your business is involved in a liability lawsuit.
You might want to get business auto insurance to cover you while on you’re on business trips if you drive your car for business purposes. Most personal auto policies won’t cover business driving.
Taxes and Sole Proprietorships
A sole proprietor pays federal and state income taxes on all the net income of the business (income minus deductions), even if you don’t have cash on hand to pay these taxes.
Your business income is included with your personal income on your personal tax return. The tax rate you pay may on your business income can be hard to determine because it’s all combined. The corporate tax rate is a flat 21% for all corporate income levels, so your tax rate might be higher or lower, depending on your personal tax rate.
And don’t forget the self-employment tax. Sole proprietors must pay self-employment tax (Social Security and Medicare) on the profits of their business. This withheld from your business income, so you’ll probably have to make quarterly estimated tax payments for this and your business income tax.
The IRS publishes a Tax Guide for Small Business, which you might find helpful in dealing with federal taxes.
Check with Tax and Legal Professionals
Check with your tax and legal advisors before settling on a business form, even if you have a very small, one-person business. There may be other things you should consider before you start a sole proprietorship business.
When a business owner is starting out, operating as a sole proprietor often makes sense. As the business grows, switching from sole proprietorship to LLC could be a wise choice. Learn how to convert from sole proprietorship to LLC.
Sole proprietorship vs. LLC: What’s the difference?
It can be hard to know if changing from a sole proprietorship to an LLC is right. Take a look at these key points on each business structure to help you decide.
Sole proprietorships are…
- Owned by one person
- Easy and affordable to form
- Considered the same legal entity as the owner
With a sole proprietorship, you are personally responsible for all business losses, debts, and liabilities.
Limited liability companies (LLCs) are…
- Owned by one person or more (called members)
- Moderately easy and affordable to form (in most states)
- Considered different legal entities than the owners
LLCs combine aspects of corporations and partnerships. An LLC separates business and personal liabilities, so your assets are protected and owners not liable for business debts. There is also a shared tax responsibility between members, like a partnership.
How to change from sole proprietor to LLC
Converting a sole proprietorship into an LLC can help you grow your business and protect your personal property. Follow these steps to make the transition.
1. Check your business name
When you are converting a sole proprietorship to an LLC, you need a unique business name. Your current business name might already be registered to another LLC in your state. If that’s the case, you cannot operate as an LLC under that name, even if you’ve been using it as a sole proprietorship.
Check if the name is available by contacting your state’s secretary of state office. Many states have an online database for registered business names. You can also have a legal professional help you propose a name for your LLC.
Once you’re sure no one in your state uses your business name, make sure it doesn’t infringe on anyone’s trademark. Use the United States Patent and Trademark Office’s database to search trademarks.
You must include “Limited Liability Company” in your business name. Or, you can use an abbreviation like “LLC,” “Ltd.,” or “Liability Co.”
Usually, you don’t need to register your LLC name. The name is automatically registered when you file paperwork to form the LLC. State rules differ, so double check with your state.
2. File articles of organization
To form an LLC, you must fill out an official form and send it to your state’s filing office. Each state has different requirements for the articles of organization.
It is a short, simple document that outlines details about your business. Information on the articles of organization include:
- LLC’s name
- Names of owners
You need to pay a fee to submit your articles of organization. Most submission fees are about $100, but some states charge more.
The articles of organization usually require a registered agent to receive legal papers. If you are the sole owner of the LLC, you are the registered agent. If you have a multi-member LLC, you will need to appoint one member as the registered agent.
3. Write an LLC operating agreement
An LLC operating agreement sets the rules for ownership and operations. This document maps out how the business will be managed. The operating agreement includes details about the LLC members’ rights and responsibilities, voting power, and portions of profits and losses.
You don’t have to submit an operating agreement to any government or legal organization. But if you have more than one member, it’s a good idea to create one. An LLC operating agreement reduces conflict between members.
4. Announce your LLC
Some states require you to publish a public notice stating that you intend to form an LLC. You can publish the announcement in a local newspaper.
You might need to publish the notice several times and submit written proof to the LLC filing office. Check with your state to see the exact requirements for publishing a notice.
5. Apply for a new bank account
When you form an LLC, you create a new legal entity. The business has many of the same rights as a person, including being able to own property and open a bank account.
Opening a bank account under the name of the LLC helps you separate business and personal funds. A separate business bank account helps you protect personal assets, keep records, and report taxes.
6. Get business licenses and permits
You need to register new business licenses and permits for your LLC. Check with your state to find out which licenses and permits apply to your business. Licenses you might need include a business license, seller’s permit, and zoning permit.
You must apply for a new Employer Identification Number (EIN) with the IRS. This is true even if you already have an EIN for your sole proprietorship.