If you’re currently self-employed in the state of Delaware, or if you’re looking to enter the world of one-person business ownership, you’ve probably looked into becoming a sole proprietor.
The sole proprietorship is the simplest business ‘format’ in America, but that doesn’t mean that there aren’t rules and regulations to follow when you operate one. In addition, there are some limits to the functionality of a sole proprietorship.
In this guide, we’ll help you determine whether or not the sole proprietorship is a good choice for your business.
What Is a Delaware Sole Proprietor?
As opposed to a corporation or limited liability company (LLC), the sole proprietorship is not a legal business entity. The sole proprietorship is a one-person business that is not considered to be a distinct entity from the person who owns it, and it is frequently operated using the owner’s personal name.
Here are the three main things you need to know:
Because there’s no distinction between the owner and the business itself, sole proprietors don’t need to file business tax returns ― they instead simply claim any business profits or losses on their personal tax returns.
Sole proprietors are allowed to sign contracts using their personal name, and along those same lines, customers can write checks to the business by using the sole proprietor’s name.
The other big difference between sole proprietorships and more formal business structures is the fact that sole proprietors are allowed to commingle business and personal assets as much as they want to. With LLCs and corporations, ownership is required to keep their assets separate from those of the company. The downside of this aspect for sole proprietors is that if your business is sued, creditors are free to pursue your personal assets like your house, car, personal bank accounts, etc. For corporations and LLCs, creditors are limited to your business assets.
How to Become a Delaware Sole Proprietor
When it comes to being a sole proprietor in the state of Delaware, the formal setup process is fairly minimal. Although you will need to obtain a business license and pay a small fee, the process is rather easy when you’re the only person managing your business.
However, just because it’s so easy to get started doesn’t mean there aren’t some additional steps you should take along the way. While these parts of the process aren’t strictly required, many sole proprietors find that they are in their best interests.
A doing business as (DBA) name is a crucial part of many sole proprietorships, as it enables you to use an assumed name for your business, rather than your own personal name. The advantages of acquiring a DBA start with image ― most customers feel that an assumed name is more professional and trustworthy than doing business with a company that uses its owner’s personal name instead.
That said, sole proprietors can sign up for a business bank account using their DBA name, which is another step that goes a long way toward making customers feel more comfortable doing business with you.
You can begin the process of obtaining a DBA in Delaware by running a trade, business, and fictitious names search to see if your desired name is already taken. If your desired DBA is available, you must then submit a Registration of Trade, Business, and Fictitious Name Certificate with the county in which you plan to do business. You can find information about where to submit your certificate here.
If you require a more detailed explanation of the process of obtaining a DBA in Delaware, you can take a look at our article dedicated to the subject.
Determine Taxation Requirements
Sole proprietors without employees usually don’t need to acquire a federal tax ID number (EIN), because as a one-person business, you can typically just use your own social security number for most things an EIN is used for. Still, if you would rather not use your SSN for privacy purposes, it would be a good idea to get an EIN regardless.
Beyond that, the nature of your business will determine which taxes apply to you as a sole proprietor.
Businesses in certain industries, such as motor vehicles, rental properties, or retail, will need to register for industry-specific taxes, so you should ensure that you understand your sole proprietorship’s tax obligations. Luckily, the State of Delaware makes this process rather easy with its One Stop Business Registration and Licensing, which allows you to register your business with the Delaware Department of Revenue and automatically sign up for any taxes that you need to pay.
Obtain Business Licenses and Permits
There isn’t a requirement in Delaware for sole proprietors to acquire a general business license, but depending on the nature of your business you may need other licenses and/or permits to operate in a compliant fashion.
In Delaware, all businesses – including sole proprietorships – must register for a general business license with the State of Delaware. This license is valid for up to one year, and it expires on December 31st of each year regardless of when you initially file. The standard filing fee for this general license is $75, but if you obtain your license mid-year, that fee will be prorated. You can apply for this permit when you register your business on the One Stop Business portal, or you can download, fill out, and mail this pdf to the Delaware Division of Revenue.
In addition to this general business license, you may also need industry-specific licenses or permits to operate your sole proprietorship in a compliant fashion. Delaware has several of these licenses and permits, so you should use the One Stop Business Registration and Licensing system to determine whether any of these will apply to your sole proprietorship.
In addition, you should check to see if your business needs any licenses or permits on the local level.
Sole proprietorships are an incredibly simple business classification, so the State of Delaware only requires a minimal business licensing and registration process. Additionally, depending on how you use your sole proprietorship and what industry you operate in, you still might have some important steps that need to be taken.
When it comes to issues of taxation, licenses and permits, or even the name you want to call your sole proprietorship, you do need to be vigilant to make sure you’re not overlooking anything.
We hope this guide helped you answer any questions you had for sole proprietorships in Delaware, and we wish you success with your business!