Are you an aspiring entrepreneur looking to start your own business in the great state of Iowa? You’re not alone! With over 66% of businesses in Iowa being sole proprietorships, it’s clear that many people have chosen this business structure to pursue their dreams.
In this guide, we’ll walk you through the process of registering a sole proprietorship in Iowa, from understanding what a sole proprietorship is, to steps to register, and an overview of business licenses.
So, let’s dive in and get you on the path to success!
Related: Guide to starting a business in Iowa
What is a sole proprietorship?
A sole proprietorship is the simplest form of business ownership, where an individual business owner is the sole owner and operator of the business. In Iowa, and just like in other states, a sole proprietorship is not a separate legal entity from its owner. This means that the owner is personally liable for all business debts and obligations.
In addition to a sole proprietorship, there are three other types of business structures. These include:
General partnership: A general partnership involves two or more people carrying out a business together. Each partner contributes to all aspects of the business, including money, property, labor, or skill. In return, each partner shares in the profits and losses of the business. Like a sole proprietorship, the business and the owners are legally the same; each partner is personally liable for the partnership’s debts.
Corporation: A corporation is a legal entity separate from its owners (shareholders). It has most of the rights and responsibilities that individuals possess: it can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. The most significant benefit for owners is that they have limited liability, meaning they are not personally responsible for the corporation’s debts and obligations.
Limited Liability Company (LLC): An LLC is a hybrid type of legal structure that provides the limited liability features of a corporation and the ease of administration of a sole proprietorship or partnership. Owners of an LLC are referred to as members, which may include individuals, corporations, other LLCs, and foreign entities.
Each of these structures has its advantages and disadvantages, and what works best depends on the specific circumstances of the business, including its size, the number of owners, the industry, and the financial situation.
Advantages and Disadvantages of a Sole Proprietorship
Sole proprietorships are favored by independent contractors, home-based businesses, personal service providers, and skilled tradespeople. This structure is popular because it’s easy to set up, offers full control, and fits well with businesses that have a single owner-operator.
Let’s take a closer look at the advantages and disadvantages:
- Simple and cost-effective: Registering and operating a sole proprietorship in Iowa is relatively easy and inexpensive. You don’t have to deal with the formalities and costs associated with forming a separate legal entity like a corporation or LLC.
- Full control: As the sole owner, you have complete control over all decision-making processes without having to consult with other stakeholders.
- Tax simplicity: Sole proprietors report business income and expenses on Schedule C of their personal tax return. You avoid the additional filings and fees of corporate tax returns.
- Personal liability: The major downside of a sole proprietorship is that the owner is personally responsible for all business debts and liabilities. In the event of a lawsuit or financial difficulty, your personal assets could be at risk.
- Limited resources: Unlike larger businesses, sole proprietorships may have limited access to funding or resources. This can make it challenging to expand or invest in growth opportunities.
- Lack of continuity: Since a sole proprietorship is tied to the owner, the business may cease to exist upon the owner’s death or retirement.
If personal liability protection is important, learn more about the Iowa LLC.
Steps to Start a Sole Proprietorship In Iowa
Step 1: Choose a Business Name
The first step in starting your sole proprietorship is selecting a business name.
In Iowa, you have the option to use your legal name or file a Trade Name (also known as a DBA or “Doing Business As,” Assumed Name, or Fictitious Business Name) if you want to operate under a different name.
If you choose a Trade Name, you’ll need to register it with the County Recorder in the county where your business operates.
Step 2: Register a Trade Name
If you’re starting a sole proprietorship and want to use a Trade Name (a name that’s different from your own personal name), you must first file a form with the County Recorder in the county where your business will be located. This is required under Section 547.1 of Iowa law.
For example, if John Smith decides to operate his photography business as “John Smith,” there is nothing he needs to do. If he wants to operate as “Captivating Moments,” he would need to file a Trade Name registration form for “Captivating Moments” with the County Recorder.
This Trade Name registration will include:
- The trade name you want to use for your business
- Your full name
- Your post office address (where you receive mail)
- Your residence address (where you live)
- The address where the business will be conducted
In other words, before legally operating your business under a Trade Name, you need to tell the county the name of the business, who you are, where you live, where you get your mail, and where your business will be.
This law helps to ensure transparency and accountability in business operations. If there’s ever a legal dispute or issue, it’s clear who owns the business and where they can be contacted.
Step 3: Obtain Business Licenses and Permits
Before you open your doors for business, it’s important to research and obtain any required licenses and permits. Thankfully, Iowa doesn’t require a general business license at the state level, however, depending on the business activity or location, you may need to acquire other types of licenses. A few of these could include:
Local business license: Even though a state license isn’t required, you may also need to acquire local licensing to operate your business. The specific requirements vary depending on the city where you intend to do business. For example, the city of Davenport requires all businesses to register, while only certain businesses need to register in Des Moines. Check with your city government office to know the necessary permits and licenses your business needs.
Sales tax permit: Another licensing requirement in Iowa is a sales tax permit. If your business involves selling goods or services, you need to obtain a permit from the Iowa Department of Revenue to collect and remit sales tax. After registering for a sales tax permit, you will receive a certificate to display at your business location.
Employer Identification Number: The Employer Identification Number (EIN) is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses operating in the United States. An EIN (also referred to as a tax ID number) is necessary for businesses that have employees, pay taxes, or set up a business bank account. A sole proprietor without employees will instead use the owner’s Social Security Number.
Related: How to register for an EIN
Professional licensing: Certain professions also require a license in Iowa, such as alarm installers, commercial kitchens, accountants, and others. Licenses are issued by the Iowa Professional Licensing Bureau, which oversees licensing for various professions. To obtain a professional license, you’ll need to meet specific requirements, such as educational qualifications, training, and passing an examination.