How to Form a Sole Proprietorship in Ohio

Many Ohio businesses are formed as sole proprietorships because this type of business is relatively simple to set up, and the individual business owner maintains complete control over the management and profits of the business. A sole proprietorship can be formed without any official registration with the state, but there may be additional licensing and registration requirements depending on the type of business.

Anyone who owns 100 percent of a business is a sole proprietor. This is a type of business entity in which one single owner is completely responsible for making the business decisions and paying its liabilities and debts. Under Ohio law, an individual owner of a sole proprietorship is the same legal entity as the business, though the owner should keep their finances separate and set up a business bank account.

The good part of being a sole proprietor is that all business profits and assets are that individual's profits and assets. The downside? All business losses and liabilities are the personal debts and losses of the owner.

For many business owners, it's not hard to feel frustrated and irritated by the hoops the government makes them jump through to set up their enterprise. For those living in Ohio, one solution is to operate solo. Ohio does not require registration for an individual to set up a sole proprietorship in the state. In fact, the state considers that a sole proprietorship has been formed the minute the person starts doing business on their own.

Compare this to the establishment of a limited liability company. The state has rules about selecting a name for the LLC and picking an agent for service of process, and requires specific contents of the articles of incorporation. But a sole proprietorship is nothing more or less than the alter ego of the individual owning the company. That's why it makes sense for the state to forego registration.

Nonetheless, a sole proprietor may have to fill out certain forms since some types of solo small businesses in Ohio must obtain licensing and obtain a business tax registration. If the business will be hiring employees it will need to obtain an EIN (IRS Employer Identification Number) and be set up to remit employment taxes.

If an individual uses their own name as their business name, no registration is required in Ohio. However, if they select another name under which they intend to do business, they must register it. Ohio does not recognize DBAs (doing business as names) as such, but requires business names be registered as trade names.

Once the decision is made to operate under a trade name, the individual must follow the same steps an LLC must go through to pick a name. The owner must look up the name to make sure nobody else is already using it in Ohio. There is a business name search tool on the Ohio Secretary of State's website that allows a business owner to discover if the name they hope to use is available. It's a first-come, first-served system, so the person who gets the name reserved first gets to use it.

When the individual has settled on an available business name, they should reserve it and register it. That ensures that the sole proprietorship has exclusive use of that name. There is an Ohio application form that a business must use to apply for a trade name. Fill out the application, including the owner's name, the trade name and details about the business. These include its address, the type of business and length of time the name has been in use.

Alternatively, a sole proprietor who does not wish to register a DBA can give notice to the state that they intend to use a fictitious name. This notice is also given to the Ohio Secretary of State. The chief difference between a trade name and a fictitious name is that notice of the use of a fictitious name does not give the sole proprietorship the exclusive right to use it.

Look for the form on the secretary of state's website and be sure to include the current application fee; the same form and fee are required for the trade name registration and the fictitious name notice. Generally, the application takes up to six business days to be processed. If time is critical, expedited service is available for additional fees: $100 for processing in two business days, $200 for one-business service, and $300 for four-hour service.

Does a sole proprietorship need to get a business license or a professional license in Ohio? It may, depending on its activities. If Ohio requires that an individual get a license in order to practice a certain profession or occupation, a sole proprietorship will also need a license. For example, Ohio requires that anyone practicing law in the state be a licensed member of the Ohio Bar Association.

Generally, a sole proprietorship offering legal, medical, dental, accounting, security or food preparation services will require a license. Turning the business into a sole proprietorship does not alter this requirement.

Permits may also be required depending on the activity of the sole proprietorship. Check with relevant municipal and county governments for more information. In addition, registration with the Ohio Department of Taxation will be required if the sole proprietorship will collect sales tax or hire employees. Visit the Ohio Business Gateway Electronic Filing page and register online.

For many individuals, owning a sole proprietorship is the ultimate success and the preferred business structure. The reasons are obvious: no boss to order them around, total control over their business and complete access to the income and assets of the business. Every dime the sole proprietorship earns belongs to the individual owning it. That's because the business and the individual are, for all intents and purposes, one and the same.

This is all very well as long as the business thrives and keeps raking in the dough. If there is a downturn, and the sole proprietorship must borrow money, the sole proprietor is the debtor and is liable for all debts. Likewise, if a customer, client or patient sues the sole proprietorship for malpractice, negligence or for any other reason, it is the individual who is behind the eight ball. If the lawsuit is successful, and the sole proprietorship is found to owe a large sum to the plaintiff, 100 percent of that judgment falls on the shoulders of the individual owning the business.

This personal liability can be limited by setting the business up as a limited liability company (LLC). However, Ohio imposes more than a few requirements on LLCs that a sole proprietor may be happy to avoid.