Starting your own business can be an exciting and rewarding journey, but one step to not overlook is establishing your business entity.
There are four common types of business structures to choose from, which include a general partnership, corporation, and Limited Liability Company (LLC). If you’re considering starting a business as a sole proprietorship in Hawaii, you’re in good company. According to the IRS, in 2022, there were 137,563 small businesses in Hawaii, of which 103,226 are sole proprietorships. With over 75% of all Hawaii businesses structured as sole proprietorships, it is by far the most common legal entity chosen by entrepreneurs in the state.
Whether you’re a budding entrepreneur or simply looking to turn your passion into a profitable venture, we will walk you through registering your Hawaii sole proprietorship, from understanding its advantages and disadvantages and comparing the sole proprietorship structure to an LLC.
Sole Proprietorship Overview
Starting a sole proprietorship in Hawaii is a popular choice for individuals looking to start their first business. It is an informal structure with one business owner, making it the easiest and simplest form of business structure to create.
Steps To Register A Sole Proprietorship In Hawaii
To register your sole proprietorship in Hawaii, you can follow these step-by-step instructions:
Step 1: Choose a Business Name
The first step in setting up a sole proprietorship is to select a name for the business. In Hawaii, a business can either be operated under the owner’s full first and last name or by using a trade name (also known as “doing business as,” DBA, assumed name, or fictitious business name).
Step 2: File a Trade Name
If you decide to use your personal name, you can skip this step. The obvious benefit here of using your personal name is the simplicity and ease of setup. The downside of course, is that it’s harder to build a business around an individual’s name.
Hawaii Revised Statutes Chapter 482 covers registering a trade name in Hawaii. Hawaii law requires that any person operating a business under a trade name must register that name with the state. This applies to sole proprietors choosing to do business under a name other than their full personal name.
So, for example, if your name is John Doe, you don’t have to register, but if you want to name your business “John Doe’s Surf Shop,” you will need to register the Trade Name with the Hawaii Department of Commerce and Consumer Affairs (DCCA).
To register a trade name in Hawaii, the sole proprietor must file an application with the Hawaii Department of Commerce and Consumer Affairs. This application should include:
- The proposed trade name you wish to register.
- A certified declaration stating that you are the sole/original proprietor of the trade name.
- A statement explaining the activities of the business.
This allows the state to record the trade name and formally link it to the business owner in their records. The application and a small registration fee (currently $50) are filed.
Once approved, the state will issue a certificate of registration for the trade name. Approval is valid for 5 years initially, after which the name must be renewed. The certificate provides proof you have registered the name properly.
Following Hawaii’s trade name registration process allows sole proprietors to legally operate under a business name other than their personal name. It prevents duplication and protects your chosen business name.
Related: How to file a Trade Name in Hawaii
Before choosing a trade name, it is important to ensure that it is not already being used by another business entity in Hawaii. You can check the availability of a trade name on the Hawaii Department of Commerce website.
Related: How to do a Hawaii Trade Name search
Step 3: Check for Business Licenses
Starting a business in Hawaii requires several licenses and permits, depending on the nature of the business. Here are some of the most common ones:
- General Excise Tax (GET) license: The GET license is required for all businesses in Hawaii. It allows you to collect tax from your customers and pass it on to the state. It’s obtained from the Hawaii Department of Taxation.
- Employer Identification Number (EIN): If you have employees, you will need an EIN from the IRS (sometimes referred to as a tax ID number); otherwise, the business can be identified by the owner’s social security number.
- Professional licenses: Depending on your profession, you may need a specific license to operate from the Hawaii Department of Commerce and Consumer Affairs, Professional and Vocational Licensing Division. For example, contractors, real estate agents, and certain other professions in the state require licensing.
- Business license: While the state of Hawaii doesn’t have a general business license requirement, specific types of businesses might need special licenses. For instance, some counties require licenses for certain occupations and businesses.
- Zoning and building permits: If you are constructing a new building or modifying an existing one, you may need zoning and building permits from your local government.
- Health permits: If you plan to prepare or sell food, you’ll likely need health permits or inspections.
Related: What licenses are needed in Hawaii
Understanding the Advantages and Disadvantages of a Hawaii Sole Proprietorship
As with any business structure, there are both advantages and disadvantages to choosing a sole proprietorship. Setting up a sole proprietorship in Hawaii is a pretty straightforward process, it is important to understand the advantages and disadvantages before diving in.
One advantage of a sole proprietorship is the simplicity of setting it up. Unlike other business entities, such as LLCs or corporations, there is no formal registration or fees to pay to the state. While the business entity itself doesn’t have to register, most business owners will want to register a business name. If you’re doing business by yourself, you’re automatically operating as a sole proprietorship.
Taxation for a sole proprietorship is similar to filing individual taxes. Business income and expenses are reported on the Schedule C form, which is included with your personal tax return. This simplicity can make tax filing easier for sole proprietors.
One disadvantage of a sole proprietorship is that the business and the owner are legally considered the same. This means that the owner is personally liable for any debts or legal issues that may arise, which means that personal assets could be at risk in the event of a lawsuit or debt. If personal liability protection is a concern, it may be worth considering forming a Limited Liability Company (LLC) instead.
Related: How to form a Hawaii LLC