How To Start A North Dakota Sole Proprietorship

Starting your first business can seem like a huge task. But taking the process step by step helps make it manageable. One of the first things to work on is setting up a business structure, which establishes how your company is legally organized and can impact things like taxes, liability, and record-keeping requirements.

In this guide, we’ll explain what a sole proprietorship is, discuss its pros and cons, and provide a step-by-step guide to registering one in North Dakota.

Related: How to start a business in North Dakota

What is a Sole Proprietorship?

A sole proprietorship is a type of business structure where the individual owner and the business are legally the same entity. This means there is no separation between your personal and business assets and liabilities. This choice sets the foundation for how your business will operate, your personal liability, tax obligations, and even the ability to raise funds.

Before we examine the specific advantages and disadvantages of a sole proprietorship, it’s helpful to know the other business structures:

• General partnership: A business owned by two or more people.
• Corporation: A more complex structure offering liability protection and is owned by shareholders.
• LLC (Limited Liability Company): Combines the benefits of a corporation (liability protection) and sole proprietorship (easier administration).

Sole Proprietorship Advantages

• Ease of setup: One of the most appealing aspects of a sole proprietorship in North Dakota is the ease of setting it up. There’s no need for formal registration or complex paperwork. So, if you want to start right away, a sole proprietorship is the easiest way to go.
• Minimal paperwork: Running a sole proprietorship means you won’t be burdened with the ongoing annual filings and registration fees that other structures might require.
• Tax simplicity: This structure allows you to report your business income and expenses on your personal income tax return. This approach simplifies bookkeeping and tax preparation processes.

Sole Proprietorship Disadvantages

• Unlimited personal liability: As a sole proprietor, you are personally liable for any debts or legal issues your business encounters. This means your personal assets, like your home or car, could be at risk if the business fails or is sued.
• Business continuity: The business’s lifespan is directly tied to the owner. If the owner decides to stop or if something happens to them, the business also ceases to exist. This can be particularly challenging if you have ongoing contracts that may not transfer to a new owner.
• Raising capital: Since a sole proprietorship doesn’t allow you to sell shares, it can be more challenging to raise capital compared to a corporation or LLC.

In summary, while a sole proprietorship offers simplicity and tax advantages, it’s important to consider the lack of liability protection. If this is a concern, a North Dakota LLC might be a better choice.

Related: How to form a North Dakota LLC

Steps to Start a Sole Proprietorship in North Dakota

Starting a sole proprietorship in North Dakota involves a few key steps to make sure your business is properly set up and legally compliant. While simple, following these guidelines will ensure your sole proprietorship meets state and local requirements.

Step 1: Come Up With a Business Name

As a sole proprietor in North Dakota, you can operate under your full legal name or you can create a business name. For example, John Smith could do business as “John Smith” or create a name like “Smith Consulting”.

If you want to use a specific business name that is different than your personal name, you’ll need to register it with the state. For instance, let’s say John Anderson wants to start a snow removal service. Instead of operating under “John Anderson,” he chooses “Frost Clearers” as his business name. In this case, John would need to register “Frost Clearers” as his Doing Business As (DBA) name.

Step 2: Verify Name Availability

Before registering your chosen business name, you need to ensure it’s unique and not already in use. In North Dakota, you can’t register a name that’s the same or too similar to an existing business, unless you get permission from that business. To check name availability, use the North Dakota Secretary of State’s website.

Related: How to search available business names in North Dakota

Step 3: File a Trade Name Registration

If you decide to operate under a specific business name, you’ll need to officially register it. You can file online through the Secretary of State’s FirstStop website or download and submit the Trade Name Registration Form (SFN-13401).

Related: How to file for a North Dakota Trade Name

Registering the name provides legal rights, but doesn’t prevent duplication. To keep others from using the name, consider applying for a trademark through the U.S. Patent & Trademark Office (USPTO).

Step 4: Research Business License Requirements

Understanding the business licensing and registration requirements is necessary, regardless of your business structure. The exact requirements will depend on your type of business and location, but here are some common ones to research.

• Local business license: Although the state does not require a business license, your city may have local licensing requirements. Consult your city officials or economic development office for information on local licensing.
• Sales & Use Tax Permit: Businesses that sell tangible personal property on a regular basis in North Dakota need a Sales & Use Tax Permit, also called a Seller’s Permit, from the North Dakota Office of State Tax Commissioner.
• Professional license: Some professions are regulated in North Dakota and require a license before offering specific services. Common examples include auctioneers, electricians, door-to-door home repair sellers, and cosmetologists.
• Employer Identification Number (EIN): The EIN is a unique number assigned by the Internal Revenue Service (IRS) to a business, much like a social security number fo an individual. Sole proprietorships typically don’t need an EIN unless they hire employees. However, some banks might require one to open a business bank account, otherwise, your social security number will be used for tax purposes.

Wrapping Up

Sole proprietorships offer an easy entry point without extensive paperwork or compliance burdens. However, the unlimited liability means it is not the right choice for every business. Whether a sole proprietorship is right for you depends on your personal preferences and business needs.

Now it’s your turn! Share with us in the comments section which entity you’re planning to go with for your business and why? We’d love to hear your thoughts. Also, feel free to ask any questions you might have. We’re here to help guide you through this process.