How To Start A Sole Proprietorship In Illinois
Starting a business is an exciting journey, one filled with the thrill of crafting your own path, pursuing your passion, and seeing your vision come to life.
Starting to take your vision and put it into reality brings us to one of the earliest steps of starting a business, which is forming a business entity. One of the most popular types is the sole proprietorship and here, I’ll define what a sole proprietorship is, how to create one, and answer some common questions to help with your journey to becoming a business owner in the Land of Lincoln.
What is a sole proprietorship?
Let’s start by understanding what a sole proprietorship is. It is the most simple and least expensive form of a business structure, which is owned and run by one individual. The owner, or the “sole proprietor,” is personally responsible for the business’s profits and debts. There are no partners, no board of directors, no shareholders – just you.
Sole Proprietorship Advantages
A sole proprietorship has several advantages that make it an appealing choice for many business owners.
Simplicity and Ease of Formation: Starting a sole proprietorship is straightforward and requires less paperwork than other business structures. You don’t have to file formation documents with the state, though you may need to register the business name, which can make the initial setup much quicker and easier.
Cost-Effectiveness: The cost to start and maintain a sole proprietorship are lower than other business structures as there are no formation or ongoing costs like annual report fees that are necessary for corporations and LLCs.
Control: As a sole proprietor, you have complete control over your business. You make all the decisions, which allows you to steer your business in the direction you desire.
Tax Simplicity: Sole proprietorships do not pay separate business taxes. The business’s income is your income, and it’s reported on your individual tax return, making tax time a bit simpler. This structure allows for pass-through taxation, meaning that the business’s profits and losses “pass through” to the owner’s personal tax return.
Sole Proprietorship Disadvantages
While a sole proprietorship offers several advantages, there are also potential downsides to consider. Here are a few disadvantages to consider:
Unlimited Personal Liability: In a sole proprietorship, there’s no legal distinction between you as an individual and your business. This means you have unlimited personal liability for the debts and obligations of your business. If your business can’t pay its debts or gets sued, your personal assets (like your house or car) could be at risk.
Difficulty Raising Capital: Sole proprietorships might face challenges when trying to raise money. The ability to raise funds for a sole proprietorship is strictly debt, while other entities, such as the corporation and LLC, can raise investment funds.
Less Business Continuity: A sole proprietorship is tied directly to the owner. If the owner decides to stop the business, becomes incapacitated, or passes away, the business effectively ends. This can be a big negative for businesses that have certain contracts or sell to the government.
Potentially Higher Taxes: Depending on the income level of the sole proprietorship, you may pay more taxes than you would as a corporation. This is because sole proprietors pay self-employment taxes on all profits, which cover Medicare and Social Security contributions, whereas the LLC can distribute some profits that aren’t subject to payroll taxes (which are effectively the same amount)
Lack of Corporate Benefits: Unlike corporations or LLCs, sole proprietorships can’t offer certain types of benefits and take advantage of certain tax deductions related to healthcare, retirement, etc., which could impact your ability to attract and retain employees if your business expands.
but are worried about missing out on the perks that come with an LLC, I have a tip
that should help.
You can actually start out as a sole proprietorship and later move to an LLC as your business grows and changes. There are a few accounting hoops to jump through, but at this stage you
should be working with an accountant who can properly take care of this.
How to start an Illinois Sole Proprietorship
Step 1: Come Up with a Business Name
The first step in starting a sole proprietorship in Illinois is to choose a name for your business.
If you’re a sole proprietor planning to run your business under your full first and last name, the process is pretty straightforward, as no extra steps are required. However, many businesses prefer to operate under a distinct business name. In Illinois, the legalities surrounding this process are guided by Illinois Compiled Statute 805 ILCS 405, the Illinois Assumed Business Name Act. As per this Act, if you wish to operate your business under a different name, you’re required to register for an “assumed business name,” which is commonly referred to as a “doing business as,” or simply, a DBA name.
For example, Julia Barnes, who is an experienced baker in Chicago, Illinois is starting her home-based bakery. Instead of doing business under her full name – Julia Barnes – she prefers to operate under the name “Bountiful Bakes.” In this case, she’ll need to register her assumed name, “Bountiful Bakes.”
Registering an assumed name can significantly enhance the branding and marketing of your business. It gives your business a professional edge, making it seem larger and more established than a single-person business.
However, it’s important to note that in Illinois, the registration of an assumed name isn’t mandatory for a Sole Proprietorship. If Julia would prefer to run her business under her own name, that’s entirely acceptable. She can simply do business as “Julia Barnes,” without needing to register an assumed name. This choice depends on your personal preference and how you want your business to be known by your clients or customers.
Step 2: File the Assumed Name
If you have decided to operate under an assumed name, you’ll need to visit the local County Clerk’s office where your business is located. The process varies slightly by county, but in general, the assumed name registration process includes:
1. Obtaining the Assumed Business Name form from the County Clerk. Some will have the form online, while others will require you to come to the office and pick up the form.
2. Filling out the form. Note that this form will need to be notarized in many counties before signing. Most County Clerks’ offices will notarize documents at no cost.
3. Publishing a legal notice. A legal notice is required to be published in a local newspaper that has circulation in the county where the business is located BEFORE filing the assumed name registration form. The assumed name publication notice will be published once a week for three consecutive weeks, and after the three weeks, the newspaper will send an affidavit proving the notice ran.
4. Submit the assumed name form. Take the assumed business name certificate form and affidavit to the County Clerk’s office along with the filing fee and submit.
Related: How to register an Illinois DBA
Step 3: Get an EIN
This step is optional if you don’t plan to hire employees. The EIN or Employer Identification Number is a unique nine-digit number that is assigned by the Internal Revenue Service (IRS).
The EIN is needed for Illinois businesses that are either registered as a general partnership, corporation, or multi-member Limited Liability Company or; a sole proprietorship or single-member LLC that has employees.
The EIN is optional for sole proprietorships and single-member LLCs without employees. Those business entities will use the owner’s social security number (SSN) or Individual Taxpayer Identification Number (ITIN). While it’s not required, using an EIN instead of the owner’s SSN can help protect the owner from identity theft.
Related: How to register for an EIN
Step 4: Research business license requirements
After registering the business name, you will want to research what business licenses are required. Business licenses are required regardless of the business entity and will vary on what the business does and where it’s located.
A few common types of business licenses include:
General Business License: The state of Illinois doesn’t have a general business license, but many cities do. Check with your local city or county government office to determine if your business needs one. For example, the city of Chicago requires many types of businesses to obtain a business license.
Professional Licenses: Certain professions in the state require a license before offering their services. For instance, physicians, real estate agents, barbers, and many others need to be licensed by the Illinois Department of Financial and Professional Regulation.
Health Department Permits: If you’re opening a business that involves food service (like our fictional Julia Barnes with her bakery), you may need a health department permit from your local health department.
Illinois Business Tax Number: Most businesses operating in the state will need to obtain an Illinois Business Tax Number. In addition to registering the business for state tax purposes, this registration from the Illinois Department of Revenue also allows the business to obtain a sales tax permit to legally sell products and certain services.
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Illinois Sole Proprietorship FAQs
Does a sole proprietor need a business license in Illinois?
Probably – The need for a business license in Illinois depends on what the business does and where its located in the state and not on the type of business entity.
How much does it cost to start a sole proprietorship in Illinois?
There is no cost to start a sole proprietorship in Illinois, however there will be a cost to register an assumed name and obtain business licenses.
The cost for an assumed name varies by county but expect a filing fee of $20-$50 to the County Clerk and $40-$100 for the publication of the legal notice. This is a one-time cost unless the business changes location.
What is the difference between a sole proprietorship and an LLC in Illinois?
Both Sole Proprietorships and Limited Liability Companies (LLCs) are the two most popular business structures, but they have key differences that are important to consider.
Liability Protection: The most significant difference is personal liability. In a sole proprietorship, there’s no legal distinction between the owner and the business. This means that the business owner is personally responsible for all debts and liabilities of the business. If the business faces a lawsuit or goes into debt, the owner’s personal assets (like their house, car, and personal bank accounts) could be at risk.
On the other hand, an LLC is a separate legal entity. This means the owners, known as members, are not personally responsible for the company’s liabilities and debts (unless the debts are personally guaranteed, which is commonly required when obtaining a business loan). If the company faces a lawsuit or goes bankrupt, in most cases, only the assets of the LLC can be used to pay off the debts.
Taxes: In a sole proprietorship, the business itself does not pay income tax. Instead, all profits and losses are passed through to the owner’s personal income tax. The owner pays self-employment and personal income taxes on the business profits on their personal tax return.
An LLC, however, can choose how it wants to be taxed: as a disregarded entity (like a sole proprietorship or a partnership, where profits and losses are passed through to the member’s personal income tax) or as a corporation where there may be tax savings as some of the business profits may not be subject to self-employment taxes.
Complexity and Cost: Setting up a sole proprietorship is very simple and less expensive than forming an LLC. A Limited Liability Company requires filing articles of organization with the Illinois Secretary of State and paying a state filing fee. Also, LLCs in Illinois must file an annual report and a fee.
Credibility: This benefit will vary by industry, but some people believe an LLC can give your business more credibility because it shows you’ve made a formal commitment to your business.
Which is better, an LLC or sole proprietorship?
Whether an LLC or a sole proprietorship is better for you depends on your specific situation and needs. A sole proprietorship is simple and inexpensive to start but doesn’t provide any separation between your personal and business assets. This means that if the business is sued or owes money, the owner’s personal assets may be at risk.
A sole proprietorship can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business entity. Some examples of businesses that commonly operate as sole proprietorships include freelancers, consultants, artists, and writers.
On the other hand, an LLC requires upfront paperwork and costs but could provide your business with long-term benefits that make the investment worth it. An LLC exists separately from its owners, known as members, and members are not personally responsible for business liabilities and most debts. Another bonus for the LLC is that for more profitable businesses, LLCs can save money on taxes.
Neither an LLC nor a sole proprietorship is inherently “better.” Instead, each is suitable for different circumstances and comes with its own benefits and considerations. It’s all about assessing your specific situation and determining what best suits your needs. Always remember, when in doubt, consult with an attorney or accountant to understand all the implications of your choice.
How is a sole proprietorship different from freelancing or self-employment?
The terms “sole proprietorship,” “freelancing,” and “self-employment” are often used interchangeably, but they represent different concepts.
A sole proprietorship is a type of business structure where one person owns and operates the business.
Freelancing and being self-employed are similar concepts. Both refer to working for oneself rather than being employed by a company. Freelancing is more about the type of work, and self-employment is a broad term referring to anyone who works for themselves.
Freelancers and self-employed individuals can operate as sole proprietors or form a business entity, such as an LLC, to protect their personal assets.
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