A sole proprietorship is a common business entity in Maryland. It is very easy to set up and has few filing requirements. This small business structure allows an individual to independently manage their business and retain all business profits.
Sole proprietorship, though popular, is not without its disadvantages. Anyone considering opening a business in Maryland should get an overview of the pros and cons before selecting a business structure.
What Is a Sole Proprietorship?
A sole proprietorship is an easy-to-start business structure with minimal formalities. In most states, including Maryland, the government doesn't make someone who wishes to form a sole proprietorship jump through many hoops. That means it is both easy to establish and also easy to dismantle this type of business entity.
The ease of establishment makes the option popular for those selling their services as contractors or individual consultants. The business, as its name suggests, has only one owner and it is not incorporated. Many people doing business as sole proprietors are permitted to use their own names as their business name in Maryland.
On the other hand, a sole proprietor can use a dba (doing business as) name, called a trade name in Maryland, to operate. Some feel that this gives customers more confidence in the legitimacy of the business.
Taxation of Sole Proprietorships
The sole proprietor is personally responsible for paying taxes on business profits. This is reported as personal income tax. In addition, the owner is 100 percent responsible for all debts and liabilities of the business.
Advantages of Sole Proprietorships
If ease of set up is important to a new business owner, this may top the list of the advantages of a sole proprietorship. The mandatory steps to establishing a sole proprietorship business in Maryland are very few indeed. It is not even necessary for a sole proprietor to register the business.
How does an individual go about starting this type of business? They open their doors. The business is established as soon as the individual starts doing business, although in some cases, licensing may be required. Compare this to a corporation or even a limited partnership in terms of start-up formalities to understand just how easy the sole proprietorship is to start.
In addition, a sole proprietor contracts in their own name. They have the legal right to use their own financial accounts to pay for business items and to deposit business income. Ready to close a sole proprietorship? Just close the doors and stop all business activities. That's it.
Disadvantages of Sole Proprietorships
The biggest downside of a Maryland sole proprietorship is the issue of personal liability. This is a very important matter to understand before jumping into business.
Sole proprietorships offer the owner zero protection from personal liability for business debts: A company debt is a personal debt. Corporations and other business structures, like limited liability companies (LLCs), reduce the possibility of personal liability for the owner.
Because of the personal liability structure of a sole proprietorship in Maryland, it is difficult for the owner of the company to obtain capital funding. This is another significant disadvantage to the business structure; it means that expanding the enterprise might be impossible without a change of business form.
Steps to Forming a Maryland Sole Proprietorship
It is not necessary to register a sole proprietorship in Maryland when the business is operating under the owner's name. In fact, the business doesn't have any existence separate from its individual owner since:
- Business assets belong to the owner.
- Profits are taxed to the owner.
- Sole proprietorship liabilities are owed by the owner.
Without the need for business registration, a Maryland sole proprietor avoids registration fees and renewal fees. Nor are separate business bank accounts required.
Using a DBA or Trade Name
However, some business owners may choose to operate a sole proprietorship under a dba or trade name. In this case, Maryland requires that the individual register the business name with an assumed name filing by:
- Selecting a trade name.
- Checking to see whether this name or a similar name is already in use by another company. Look at the online database of the Maryland Department of Assessments and Taxation, termed the Business Entity Search for name availability.
- Claiming an available trade name by filing a trade name application.
- Alternatively, claiming an available trade name by using the PDF file or online using Maryland Business Express.
- Paying the current filing fee for the trade name.
Occupational and Professional Licensing in Maryland
The state of Maryland does not impose a requirement that sole proprietors apply for or acquire a general business license. However, depending on the nature of the business operation, it may be necessary to obtain other types of licenses or permits.
Under Maryland law, all businesses, including sole proprietorships, must obtain licensing if the occupation or profession requires licensing at the state, county or municipal level.
In fact, most businesses in Maryland will need to obtain at least one business license, whether industry specific like retailers, wholesalers, dry cleaners and restaurants, or professional/occupational licenses, like accountants and pilots.
Determining Licensing Requirements
It is a good idea for a sole proprietor to review Maryland's comprehensive database of professions and occupations that need a license. The easiest way to do this is to register the business with the Maryland Licensing Onestop Portal.
Determine county and city government licensing requirements by checking with local authorities. Alternatively, ask the clerk of court at the municipal court in the location the sole proprietorship business operates.
Tax Account Registration in Maryland
In Maryland, sole proprietors without any employees are not required to obtain an employer identification number (EIN) from the IRS. They can instead use their own Social Security number to pay taxes. However, if a sole proprietorship has any employees, it must obtain an EIN.
In Maryland, as in other states, all businesses are required to file various employee reports and report employee income for taxing purposes on a periodic basis The EIN number must be used when reporting taxes through the Maryland Comptroller of Treasury.
- Maryland.gov: Maryland Business Express
- Maryland.gov: Business Name Application
- Comptroller of Maryland: Information for Business Taxpayers
- Incorporation Guru: How to Become a Maryland Sole Proprietorship in 2022
- The Free Legal Dictionary: Sole Proprietorship
- Maryland Taxes: Sole Proprietorship
- Investopedia: Sole Proprietorship
Teo Spengler earned a JD from U.C. Berkeley Law School. As an Assistant Attorney General in Juneau, she practiced before the Alaska Supreme Court and the U.S. Supreme Court before opening a plaintiff's personal injury practice in San Francisco. She holds both an MA and an MFA in English/writing and enjoys writing legal blogs and articles. Her work has appeared in numerous online publications including USA Today, Legal Zoom, eHow Business, Livestrong, SF Gate, Go Banking Rates, Arizona Central, Houston Chronicle, Navy Federal Credit Union, Pearson, Quicken.com, TurboTax.com, and numerous attorney websites. Spengler splits her time between the French Basque Country and Northern California.