In the vibrant business landscape of Colorado, sole proprietorships hold a significant place. According to data from the state, SBA, and IRS, a substantial portion of businesses in Colorado are sole proprietorships, showcasing the popularity and feasibility of this business structure in the state. Colorado has over 723,000 small businesses, of which approximately 65.6% are sole proprietorships. If you’re ready to join the nearly 475,000 successful sole proprietors in the state, this guide will walk you through getting legally registered.
This guide will help you understand what a sole proprietorship is, its advantages and disadvantages, and provide an overview of how to register a sole proprietorship in Colorado.
What is a Sole Proprietorship?
A sole proprietorship is a straightforward business structure where the business and the owner are essentially one entity. In Colorado, this means that the business owner is solely responsible for all the business debts and decisions. A unique aspect of starting a sole proprietorship in Colorado is the ease with which you can set up your business, giving you more time to focus on what truly matters – bringing your business vision to life.
Sole Proprietorship Advantages
Embarking on a business journey through a sole proprietorship comes with its set of advantages. Let’s look into three benefits:
- Simplicity and ease of formation: Setting up a sole proprietorship in Colorado is a straightforward process, devoid of complex procedures, allowing you to start your business journey with ease.
- Minimal paperwork: Unlike other business structures, a sole proprietorship requires minimal paperwork. This can save time and resources, allowing you to focus more on running your business.
- Flexibility: This business structure offers you the freedom to manage your business operations with a high degree of flexibility, adapting to changes swiftly and efficiently.
Sole Proprietorship Disadvantages
While a sole proprietorship offers numerous benefits, it comes with its share of downsides. Here, we explore three key disadvantages:
- Unlimited personal liability: As a sole proprietor, you are personally responsible for all the business debts and liabilities, which can potentially risk your personal assets.
- Difficulty raising capital: Sole proprietorships might find it challenging to secure funding, as investors generally prefer businesses with a more formal structure.
- Business continuity: A sole proprietorship ceases to exist when the owner dies or decides to sell the business. This lack of continuity can pose problems if the business has certain contracts.
If liability protection holds paramount importance for you, considering forming a Limited Liability Company (LLC) in Colorado could be a prudent choice, offering a shield to your personal assets and providing a more structured business entity.
Related: How to form a Colorado LLC
Steps to Start a Sole Proprietorship in Colorado
Starting a sole proprietorship in Colorado is a pretty straightforward process that doesn’t require formal registration with the state. However, there are several steps you need to follow to ensure your business is legally set up.
Step 1: Come Up With A Business Name
In Colorado, you can operate your sole proprietorship under your full first and last name or choose a business name. For instance, if your name is Alex Johnson, you can operate as “Alex Johnson” or choose a business name such as “Alex’s Mountain Adventures.” Unlike some states that require registering a unique business name, a Colorado Trade Name search is not required, giving you a hassle-free start.
Step 2: File the Colorado Trade Name Registration Form
Filing a trade name, or a doing-business-as (DBA) name begins with the Colorado Secretary of State’s corporate information website, under Colorado Revised Statute § 7-71-103. To find the correct form, go to the “Trade Name Registrations” section and click on the link for “Statement of Trade Name of an Individual.”
After filling out the necessary details, review the information for accuracy and proceed to pay the filing fee. Note that DBAs in Colorado expire annually for sole proprietors and general partnerships, necessitating online renewal before expiration.
Required: How to register a Trade Name in Colorado
Step 3: Get an EIN
Although optional for sole proprietors without employees, securing an Employer Identification Number (EIN) from the IRS can aid in safeguarding your social security number and might be a prerequisite for opening a business bank account.
Required: How to register for an EIN
Step 4: Research Business License Requirements
Although there is no general state of Colorado business license, many cities require businesses to be licensed in order to operate. The requirements for these licenses vary based on the city and the nature of your business operations.
In addition to city-specific licenses, your business might also need certain permits:
- Colorado sales tax license: Most businesses in Colorado selling a product and some services will need to register for a Colorado sales tax license (sometimes referred to as a reseller’s license, a vendor’s license, or a resale certificate) with the Colorado Department of Revenue.
- Sales tax exemption certificate: Businesses purchasing merchandise to resell will usually want to obtain a Colorado Sales Tax Exemption Certificate not to pay sales tax for merchandise being resold to customers.
- Zoning and occupancy permits: Depending on your business location, you may need to comply with specific zoning regulations or obtain occupancy permits. Home-based businesses, for instance, might need a home occupation permit.
- Building permits: If your business involves construction or major renovations, you might need a building permit from your local city or county planning department.
- Signage permits: Some cities require a permit before you can add signage to your business premises.
Before starting, check with your local city or county offices to understand your business’s specific licensing and permit requirements.