How to Create a Sole Proprietorship in South Carolina

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No business entity is easier to start in the state of South Carolina than a sole proprietorship. Since no formal formation filings are required, a businessperson opting for a sole proprietorship can open their shop the same day they make the decision. And management is just as easy, since both business income and business debt are attributed to the owner personally.

Anyone going this route needs to understand the pros and cons of a sole proprietorship, as well as other South Carolina requirements, before jumping in.

Why Pick a Sole Proprietorship?

It takes two or more persons to start a partnership, but only one to form a sole proprietorship. In fact, a sole proprietorship is defined as a business with just one owner. That individual makes all the decisions for the business and exercises total control over the profits.

If earnings belong to the sole proprietorship, they belong to the individual who owns it, also called the sole proprietor.

Taxation of a Sole Proprietorship

Both the Internal Revenue Service and the South Carolina state taxing authorities ignore the business structure of a sole proprietorship. They treat the income from this type of business as if it were earned directly by the owner.

All profits earned by the company are taxed at the tax rate that the proprietor pays on their individual tax return. Another financial result of a sole proprietorship is that the proprietor must pay the 15.3 percent federal self-employed rate for Social Security and Medicare benefits on their federal tax return.

Downsides to a South Carolina Sole Proprietorship

But there's another side to the personal nature of a sole proprietorship. Just as all income from a sole proprietorship belongs to the individual owner, all expenses and debts of the business belong to the owner as well.

This is a sword that cuts both ways. A South Carolina sole proprietor business owner must pay all debts of the business, but they can write off expenses from their taxable income.

For example, if the owner of a sole proprietorship purchases a computer and a printer for the business, both can be written off as business expenses, providing the owner with a legitimate way to lower the total amount of tax owed on their personal tax return.

Personality Liability for Debts

On the other hand, they may have to reach into their own pockets to pay for the computer and the printer. That is, if a sole proprietorship does not pay its debts, the owner is personally liable. A creditor can sue the owner personally for business debt and even lien their personal property.

This is the primary difference between a sole proprietorship and a limited liability company (LLC); the LLC business form in South Carolina limits the personal liability of the owners. If an LLC does not pay its debts in South Carolina, the owner's personal assets are not at risk.

This can become an important consideration if a business racks up considerable bills it cannot pay or declares bankruptcy. All of the sole proprietor's income and assets can be attached to pay the outstanding debts.

Creating a Sole Proprietorship in South Carolina

There are a few steps an individual must walk through in order to create a sole proprietorship in South Carolina. They include:

  • Create a business plan.
  • Select a name for the business.
  • Obtain an EIN.
  • Determine needed licenses.
  • Determine local taxes.
  • Understand employee requirements.
  • Look into retail sales tax.
  • Figure out property tax reporting.
  • Figure out required insurance and bonds.

It's important to understand each of these steps.

Create a Business Plan

A business plan is an essential part of any new enterprise, but it's not a legal requirement in South Carolina. Still, it's a great idea to pull together a plan before creating a sole proprietorship. This involves thinking through the business: what will it sell, to whom, with what publicity? How will it get initial financing?

This is a good time to research the competition and determine what the new business will offer to entice new customers. It's also worthwhile to review municipal registration, licenses and taxes early on, before a hard and fast decision is made about where to establish the sole proprietorship.

Select a Business Name

Every business form other than a sole proprietorship is required by South Carolina law to select a unique business name, one that is registered to this business and one that no other business can use.

But sole proprietors are exempt from this requirement, so they can operate the business under the name of the individual starting the business. For example, editor Jean Gomez could start a business called Jean Gomez Editing.

Using Fictitious Business Names

The owner can also operate under a fictitious business name. This can be any name like "Editing Made Easy" for example, that is not registered to another South Carolina business. Check for similar names at the name search page of the South Carolina Secretary of State's website.

It is not necessary to register a DBA (doing business as) for a sole proprietorship. To ensure that no other business uses the same name, register the business name as a trademark with the federal U.S. Patent and Trademark Office.

Get an Employer Identification Number

Consider whether the business plan for the sole proprietorship involves employees. Unlike a freelancer in South Carolina, a sole proprietorship has the right to hire employees. But if the business will hire even one employee, there is an extra hoop to jump through in preparation: getting an EIN.

A company does not need to get an employer identification number from the IRS unless it plans to hire one or more employees. The employer's identification number is a nine-digit tax number, commonly called an EIN.

This number – the business equivalent of an individual's social security number – must be used to report employee wages for tax purposes. Clearly, this applies only if there are employee wages to report. A sole proprietorship without employees simply files taxes under the owner's SSN.

But the need to get an EIN should never deter a sole proprietorship from hiring employees if the business needs them. Getting an EIN is a free, easy and rapid procedure. Anyone can apply for one online through the Internal Revenue Service website.

Check on Business Licenses

South Carolina does not require a general business license for all businesses operating in the state. However, some professions and occupations require licensing. If the sole proprietorship involves the practice of law or medicine, for example, membership in the state bar and a professional license are required.

Municipal Business Licenses

In addition, cities, towns and counties require business licenses in order to conduct business within their borders. Each administers its own business licenses, permits and registrations, so it's necessary to figure out what a sole proprietorship needs.

The Secretary of State provides useful information on municipal requirements on the webpage Do I Need A Business License?

For example, a sole proprietorship will need a local business license in the municipalities where it is physically located and conducted. If these are two or more different places, check out each to figure out whether they require business licenses.

If one of them is an unincorporated (non-city limit) area of a county, the business will require a county business license if the county imposes this requirement. Note that each municipality has its own online registration.

Retail Operating License

In addition, if a company intends to sell goods to consumers, the state requires that the business obtain a retail license. And a sole proprietorship may need other types of business licenses for other business activities, like an Alcoholic Beverage License, for example, if the business will sell wine or beer.

Figure out the licenses you will need, then file one form – Form SCTC-111, Business Tax Application – with the South Carolina Department of Revenue. The form covers all necessary licenses.

Consider Sales and Retail Taxes

South Carolina imposes a sales tax on the sale of goods and certain services in South Carolina. In addition, it imposes a use tax on goods and certain services that are bought out of state and brought into the state if no sales tax has been paid on them. South Carolina's statewide sales and use tax rate is 6 percent.

Generally, a business must pay the states sales or use taxes on all retail sales of tangible personal property. Some South Carolina counties impose a local sales and use tax as well. The standard fee for a Retail Sales Tax License is $50.

Personal Property Tax Registration

All businesses in South Carolina, including sole proprietorships, must file a business personal property return every year. County personal property tax returns are filed with the counties in which the sole proprietorship holds property. State personal property returns must be filed with the state Department of Revenue.

The business personal property tax is a business tax on all furniture, fixtures and equipment owned by the business. This includes items like computers, printers, sofas, chairs, refrigeration equipment and shelving. This tax must be reported as an acquisition cost with a deduction allowed for depreciation.

Establishing a BPP Tax Account

In order to submit the tax payments, a business needs to establish a Business Personal Property (BPP) tax account. If a business has a sales tax license, it will automatically receive a business personal property tax file number from the Department of Revenue.

Filing a BPP Tax Return

All assets claimed as owned by the business on a sole proprietor's tax returns should be reported on the BPP tax return, including:

  • Total cost of assets.
  • Income tax depreciation.
  • Net depreciated value.

These can be declared online on the South Carolina Department of Revenue's MyDORWAY page. It is reviewed by the Department. From there, the South Carolina Department of Revenue sends an assessed value of the property to the county where the business is located.

The county figures out the taxes due and forwards a BPP tax notice after September 1. The tax payment must be made no later than January 15 of the following year. A service business normally registers with the county.

Does the Business Require a Surety Bond?

Surety bonds are sometimes required when a business wishes to bid on certain projects. These bonds provide the customer with a guarantee that the project will actually be completed and many contracts, especially public contracts, mandate bonding. But bonding can be difficult to get for small businesses.

The federal Small Business Administration (SBA) steps in to guarantee surety bonds for certain surety companies. This permits the bonding companies to offer surety bonds to smaller businesses that might not otherwise meet the criteria for other sureties.

There are different types of surety bonds, and the Small Business Administration guarantees many of them. The agency guarantees bid bonds, performance bonds and payment surety bonds issued by certain surety companies. It only guarantees bonds for small businesses on small contracts, and the company must meet quality standards.