In the business-friendly environment of Connecticut, sole proprietorships represent a significant portion of the businesses operating in the state. Connecticut is home to over 371,000 small businesses, of which approximately 259,000 or 69.7% are sole proprietorships.
Many entrepreneurs have chosen sole proprietorships due to their simplicity and ease of setup. This guide will provide you with an understanding of what a sole proprietorship is, its advantages and disadvantages, and a step-by-step guide on how to start one in Connecticut.
What is a Sole Proprietorship?
A sole proprietorship is a simple and common form of business structure where one person owns and operates the business. With a sole proprietorship, there is no formal setup process or fees involved with forming one. This makes starting a sole proprietorship in the state relatively easy.
Sole Proprietorship Advantages
Starting a business as a sole proprietorship in Connecticut comes with several benefits. Let’s look at a few of them:
- Simplicity and ease of formation: Setting up a sole proprietorship in Connecticut is straightforward because it does not require any formal registration with the state.
- Lower startup costs: Since there are no formal setup fees or processes, starting a sole proprietorship in Connecticut is less expensive than other business structures.
- Tax simplicity: Sole proprietors report their business income and expenses on their personal tax return, which can simplify the tax filing process.
Sole Proprietorship Disadvantages
While there are advantages, it is also essential to be aware of the potential downsides of operating a sole proprietorship.
- Unlimited personal liability: As a sole proprietor, you are personally responsible for all debts and liabilities of your business.
- Difficulty raising capital: Financing options are limited to the owner’s personal assets and credit.
- Limited life: The business does not exist separately from the owner. Therefore, if the owner decides to stop the business or passes away, the business ceases to exist.
If protecting your personal assets is a priority, you might consider forming a Limited Liability Company (LLC) in Connecticut, which safeguards your personal assets from business liabilities.
Related: How to form a Connecticut LLC
Steps to Start a Sole Proprietorship in Connecticut
Step 1: Choose a Business Name
As a sole proprietor, you can operate your business under your own name, or you can choose to operate under a trade name, which is called a Doing Business As or DBA in some places. If you choose to operate under a DBA, you will need to file a Trade Name Certificate with the town clerk in the town where your business is located.
For instance, if your name is Sarah Jones, you can operate as “Sarah Jones” or choose a business name such as “Sarah’s Coastal Cafe,” by filing a Trade Name Certificate as outlined under § 35-1 of Connecticut General Statutes.
Step 2: File a Trade Name Certificate
If you opt to use a business name different from your own, you will need to file a Trade Name Certificate with the Town Clerk where the business is located.
Before a new business name can be registered, the name will have to be searched with the Office of the Town Clerk to be sure it isn’t already being used or is too similar to another local business.
Related: How to register a Connecticut trade name
Step 3: Get an EIN
An Employer Identification Number (EIN) is a nine-digit number that is used by businesses to identify themselves to the government. Although it is not required for sole proprietorships without employees, it can be helpful to have an EIN for certain business activities, such as opening a business bank account.
Related: How to register for an EIN
Step 4: Research business license requirements
Depending on the type of business you are operating and the location of your business, you may need to obtain a few types of business licenses.
For starters, there is no general state business license in the state of Connecticut. However, various towns require businesses to obtain specific licenses. The actual licenses will be based on the location and activities of the business. In addition, you may need to verify zoning regulations and potentially acquire an occupancy permit.
A home occupation permit might be necessary for home-based businesses, depending on city requirements. If your business involves any construction or renovations, a building permit from the city or county building and planning department might be required. Additionally, some municipalities require a permit for adding signage to a building.
If your business sells, rents, or leases goods, offers a taxable service or operates a hotel, motel, or lodging house, you must obtain a Sales and Use Tax Permit from the Connecticut Department of Revenue Services. This registration comes with a one-time state fee of $100. If you are purchasing merchandise to resell, obtaining a Connecticut Resale Certificate is advisable to avoid paying sales tax for resold items.
Last, certain professions in Connecticut are regulated and require registration before offering services. A few of these include acupuncturists, athletic trainers, landscape architects, and pharmacists, among others. Specific licenses are also required for certain types of businesses not covered by the state, such as food-related establishments, daycares, and salvage dealers.
Related: What business licenses are needed in Connecticut?
Sources:
Small Business Administration
Internal Revenue Service
CT.gov
Connecticut Department. of Revenue
