Embarking on the journey of establishing a new small business in the picturesque state of Alaska is both thrilling, but there are some legal requirements to be aware of. One of these is forming the business structure.
There are a range of business structures that exist to cater to diverse needs, among which the sole proprietorship stands out. This structure is favored by many for its cost-effectiveness and simplicity in setting up compared to other entities. In Alaska, there are 52,409 sole proprietorships out of the 74,587 small businesses in the state.
Here, I’ll shed light on the concept of a sole proprietorship, who it’s for, and provide a guide on how to get registered.
Related: How to start a business in Alaska
What is a Sole Proprietorship?
A sole proprietorship is the simplest business structure that can be formed. Unlike the corporation or Limited Liability Company (LLC) which are other types of legal entities that are separate from the business owner; a sole proprietorship refers to a person who owns the business and is personally responsible for its debts. The business and the owner are considered the same legal entity, and the owner has unlimited personal liability for the business.
Sole Proprietorship Advantages
Operating as a sole proprietorship can offer numerous benefits:
- Simplicity: Setting up a sole proprietorship is a straightforward process, often requiring nothing more than registering your business name. Unlike an Alaska corporation or LLC which requires filing formation documents, appointing a registered agent, filing an annual report, etc, the sole proprietorship is much easier to start and run.
- Cost: A sole proprietorship doesn’t require filing formation documents with the state, unlike the corporation and LLC.
- Control: As the business’s sole owner, you have complete control over all business decisions.
- Tax flexibility: Profits and losses from the business are reported directly on the owner’s personal tax return. The business itself is not taxed separately.
Sole Proprietorship Disadvantages
However, sole proprietorships also come with some drawbacks:
- Personal liability: As a sole proprietor, you’re personally liable for all business debts and obligations. This means that if your business is sued, your personal assets could be at risk.
- Difficulty raising capital: Sole proprietorships may have a harder time raising money, as you can’t sell stock in the business.
While sole proprietorships can be straightforward and easy to manage, they do come with significant downsides, particularly when it comes to personal liability. In a sole proprietorship, the owner is personally liable for all business debts and obligations, potentially putting personal assets at risk.
If protecting your personal assets is important, then you might want to consider forming a Limited Liability Company (LLC) instead. An Alaska LLC offers a separation between personal and business assets, providing a shield for your personal belongings in case of business debts or legal issues.
You can actually start out as a sole proprietorship and later move to an LLC as your business grows and changes. There are a few accounting hoops to jump through, but at this stage you should be working with an accountant who can properly take care of this.
How to Start an Alaska Sole Proprietorship
Step 1: Register for a business license
Before registering a sole proprietorship in Alaska, a state business license is required.
Step 2: Check for name availability
Next, you have the option of officially registering a business name for an Alaska sole proprietorship.
In order to register the name, you need first to make sure that your business name is available. Every business name in the state must be unique, so to find out if the name you want is available, conduct a name search on the Alaska Department of Commerce, Community, and Economic Development, Division of Corporations website.
While it is optional, the reasons to officially register the business name include:
– Proving the business exists
– Stopping any other business from registering the same name in Alaska
– Some banks, merchant processors, and vendors require one
Step 3: Fill out the Business Name Registration form
Step 4: Get an EIN
This step is optional if you don’t plan to hire employees. The EIN or Employer Identification Number is a unique nine-digit number that is assigned by the Internal Revenue Service (IRS).
The EIN is needed for Alaska businesses that are either registered as a general partnership, corporation, or multi-member Limited Liability Company or; a sole proprietorship or single-member LLC that has employees.
The EIN is optional for sole proprietorships and single-member LLCs without employees. Those business entities will use the owner’s social security number (SSN) or Individual Taxpayer Identification Number (ITIN). While it’s not required, using an EIN instead of the owner’s SSN can help protect the owner from identity theft.
Related: How to register for an EIN
Step 5: Check for other business license requirements
While the state business license will have already been registered, there may be a few other licenses your business needs. Business licenses are required regardless of the business entity and will vary depending on what the business does and its location.
A few common types of business licenses in Alaska include:
City Business Licenses: Many cities require businesses to be licensed in order to operate legally. For instance, the Municipality of Anchorage requires a business license for businesses such as pawnbrokers, ice cream trucks, shooting galleries, tow trucks, and more.
Health Department Permits: If you’re opening a business that involves food service, you may need a health department permit from your local health department.
Professional License: A variety of professions in the state are regulated and need to be registered before offering certain services. A few common occupations that require licensing in Alaska include; acupuncturists, barbers, home inspectors, accountants, and many more.
This material is property of StartingYourBusiness.com
Alaska Sole Proprietorship FAQs
Does a sole proprietor need a business license in Alaska?
Yes, all businesses in Alaska need a state business license to operate, even sole proprietorships. Depending on your location and the business activity, you may also need other local or industry-specific business licensing.
How much does it cost to start a sole proprietorship in Alaska?
The cost to start a sole proprietorship in Alaska is relatively low. At a minimum, there’s a $50 fee for the state business license and a $25 fee for filing an Alaska DBA name.
The DBA will need to be renewed every five years.
What is the difference between a sole proprietorship and an LLC in Alaska?
The main difference lies in liability protection. With a sole proprietorship, the owner has unlimited personal liability for the business, whereas an LLC provides limited liability protection. This means that the owners (members) of an LLC are not personally responsible for the company’s debts and liabilities.