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Starting a Business in DC: What Type of Business Is Right for You? the Sole Proprietorship

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Starting a Business in DC: What Type of Business Is Right for You? the Sole Proprietorship Starting a Business in DC: What Type of Business is Right for You? The Sole Proprietorship One of the most important decisions for a businessman or businesswoman is determining the form of business organization to use for his or her enterprise. There are several forms of business organization that are available to you. This information sheet will discuss the benefits and disadvantages of a sole proprietorship. • What is a Sole Proprietorship? • How do I form a Sole Proprietorship? A sole proprietorship is a basic form of business in which the owner is fully and personally liable for all the obligations No written document or registration is required to form or (including debts) of the business, is entitled to all of its profits, register a sole proprietorship. Individuals deciding to begin a and exercises complete managerial control. A sole business and operate it as a sole proprietorship simply begin proprietorship is not a separate entity. conducting business after obtaining the necessary licenses and certificates. • What are the advantages of a Sole Proprietorship? If the owner of a sole proprietorship is operating the business under a trade name, he or she must register that trade o Formation name with the Department of Consumer and Regulatory Affairs (DCRA). This can be completed online at The advantage of operating a new business as a sole https://corponline.dcra.dc.gov or by mail by downloading Form proprietorship is that it is simple and does not require any formal TN-1-4. action to establish. You can start your business today as a sole proprietorship because you do not need to file registration • What licenses and certificates must I obtain? documents. DC requires many types of businesses to obtain specific licenses o Taxation and permits. Even if a specific license is not required, a general basic business license often is. A list of business activities having Sole proprietors are taxed only once, at the personal level. special license and permit requirements and information about There is no taxation of a sole proprietorship's income at the the general basic business license can be found at: entity level. This is different from the taxation of most https://dcra.dc.gov/node/514522 corporations. A corporation would have to pay tax on its income After determining your business’ location, you will need to as an entity, and when the remaining income is distributed to the obtain either a Certificate of Occupancy (running the business shareholders, the shareholders would also have to pay tax on from an office or storefront) or a Home Occupation Permit the income they received from the corporation. (running the business from your home). Generally, if you are leasing space and the owner of the building has a Certificate of • What are the disadvantages of a Sole Proprietorship? Occupancy that covers your type of business, then you do not need to apply. Applications for these permits must be submitted Sole proprietors have unlimited liability for the wrongs and in person at the DCRA Permit Center and can be downloaded debts of the business. Business debts are considered your from: personal debts. This means that the proprietor's personal assets, https://eservices.dcra.dc.gov/DocumentManagementSystem/H such as home and personal bank accounts, may have to be used ome/retrieve?id=Certificate%20of%20Occupancy%20Applic to pay off the debts or other liabilities incurred by the business. ation.pdf This is in contrast to limited liability. In an LLC, for example, a (Certificate of Occupancy) member's liability is limited to the amount the member has https://eservices.dcra.dc.gov/DocumentManagementSystem/H invested into the company. Thus, the member's personal assets ome/retrieve?id=Home%20Occupation%20Permit%20Applica are not at risk. tion.pdf In addition, it is difficult to transfer or sell a sole (Home Occupation Permit) proprietorship to another person. The owner cannot simply sell the business. Instead, he or she must sell off the business's • What tax-related requirements should I know about? individual assets and "goodwill." Goodwill is limited to the value of the business's reputation and relationship with customers. Most businesses (for example, those with employees) must obtain a Federal Employment Identification Number (FEIN) for tax filing • How are Sole Proprietorships operated? and reporting purposes. The FEIN Form SS-4 can be found at: https://www.irs.gov/pub/irs-pdf/fss4.pdf Sole proprietorships allow for flexible operation. The owner Organizations can also apply for a FEIN online at: makes all decisions and is not required to follow any formalities. https://sa.www4.irs.gov/modiein/individual/index.jsp 2/19 DC businesses must also complete the Combined Business Tax Registration, Form FR-500. For FR-500 requirements and online registration information, visit: https://otr.cfo.dc.gov/page/new-business-registration Sole proprietors report business income and losses on their individual tax returns: IRS Form 1040, using Schedule C. Sole proprietors are also generally required to pay Self-Employment Tax, reported on IRS Schedule SE. Sole proprietors may also be required to file quarterly Form ES-1040 along with payment of one quarter of any amount of income tax and social security taxes estimated to be due for the year. Sole proprietors should consult their accountant regarding any personal income tax filing requirements. The employees of sole proprietorships are subject to federal withholding tax, and the sole proprietor needs to submit W-2 and W-3 forms. A sole proprietorship with employees needs to file an IRS Form 941 every quarter and IRS Form 940 annually. Copies of these and other forms, as well as additional information about federal taxes, can be obtained at: https://www.irs.gov/businesses/small-businesses-self- employed/small-business-forms-and-publications • Where can I find more information? For general DC business information visit the DC Department of Consumer and Regulatory Affairs website at http://www.dcra.dc.gov or call at (202) 442-4400. For DCRA documents and forms, visit: https://eservices.dcra.dc.gov/DocumentManagementSystem For additional information on starting and maintaining a business, visit: https://business.dc.gov For an overview of federal tax information, visit the IRS website at: http://www.IRS.gov For more information about small businesses, you can visit the Small Business Administration website at: http://www.SBA.gov. © 2019 D.C. Bar Pro Bono Center This communication is provided as a public service by the D.C. Bar Pro Bono Center solely for informational purposes, without any representation that it is accurate or complete. It does not constitute legal advice and should not be construed as such. It does not create an attorney-client relationship between the recipient and any other person, or an offer to create such a relationship. This communication contains information that is based, in whole or in part, on the laws of the District of Columbia and is current as of the date it is written. However, laws vary from state to state and may change from time to time. As a result, the information may not be appropriate for anyone operating outside the District of Columbia and may no longer be timely. Consult an attorney if you have questions regarding the contents of this communication. 2/19 .
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