Starting a business in Delaware? One of the most straightforward and cost-effective ways to start a business is by establishing a sole proprietorship. The simplicity of setting up a sole proprietorship makes it a popular choice among first-time entrepreneurs in Delaware, as out of the 107,000 businesses registered in the state, 58,000 are sole proprietors.
In this guide, you’ll learn what a sole proprietorship is, its advantages and disadvantages, along with a step-by-step guide on how to register one in Delaware.
What is a Sole Proprietorship?
A sole proprietorship is an unincorporated business structure owned and operated by one individual. In the eyes of the law and for tax purposes, the business and the owner are considered the same entity. This means the owner is responsible for all aspects of the business, including the management, finances, and liability.
Sole Proprietorship Advantages
Simplicity and ease of formation: In Delaware, sole proprietorships are not required to register with the state.
Control: As the sole owner, you have complete control over all decisions and operations. This means you can steer the business in any direction you see fit without needing to consult with partners or board members.
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
Unlimited personal liability: One of the major downsides of a sole proprietorship is that the owner is personally liable for all business debts and obligations. This means that if your business is sued or owes a debt, your personal assets can be used to satisfy these liabilities.
Difficulty raising capital: Sole proprietorships may find it challenging to raise funds as options are limited to debt.
Limited life: The existence of a sole proprietorship is tied to the life of the owner. The business dissolves when the owner exits or passes away.
If liability protection is important to you, forming a Limited Liability Company (LLC) in Delaware could be a better choice. An LLC provides limited liability protection, meaning your personal assets are protected if your business is sued.
Related: How to form a Delaware LLC
Steps to Start a Sole Proprietorship in Delaware
Establishing a sole proprietorship in Delaware doesn’t require any formal registration with the state. However, there are a few steps you need to take to ensure your business is legally set up.
Step 1: Come Up With A Business Name
In Delaware, you have the freedom to operate under your full name or a distinct business name. For instance, if your name is John Doe, you can operate as “John Doe” or choose a business name such as “John’s Fresh Produce” by filing the Trade, Business & Fictitious Name form.
Step 2: File the Trade, Business & Fictitious Name Form
If you choose to operate under a business name, you will need to file a Trade, Business & Fictitious Name form. This form serves as a public notice of your business name and must be unique, not closely resembling other names already on record.
Step 3: Get an EIN
Obtaining an Employer Identification Number (EIN) from the IRS is optional for sole proprietors without employees. However, it can be useful for keeping your social security number off certain business documents. Some banks may also require an EIN before opening a business bank account.
Related: How to register an EIN
Step 4: Research Business License Requirements
Every person or entity conducting a trade or business in Delaware (including sole proprietorships) is required to obtain a business license from the Delaware Division of Revenue. The application can be made online through the Delaware One Stop Business Licensing and Registration Service or by completing the Combined Registration Application (CRA) form. Although Delaware doesn’t impose a state sales tax, it does require a gross receipts tax for most businesses. The CRA form will provide more detailed information on rates and exclusions.
The average filing fee for a Delaware Business License is $75 for the first location, and it takes between two weeks to a month to process.
In addition to the State Business License, many cities also require businesses to be licensed. The rules and fees for city business licenses vary depending on the city and the nature of the business.
Certain occupations and professions in the state are regulated and must be registered before services can be offered. These include accountants, cosmetologists, gun dealers, appraisers, among others. More information can be obtained from the Delaware Division of Professional Regulation.