Sole proprietorships are businesses owned by a single person. They're usually small businesses that have all of the income and revenue go to the owner, who can choose to put it back into the business or pay themselves a salary.
The requirements for a sole proprietorship in Virginia are straightforward. In fact, people who freelance or do any type of business without forming a legal entity are usually treated and taxed as a sole proprietorship.
Still, there are benefits to registering your sole proprietorship and you'll have to obtain the necessary permits and licenses if you plan on selling specific products like food or drinks. While the process may seem complicated, don't panic, because we're here to help. Read on to learn more about a sole proprietorship in Virginia.
Sole Proprietorship Virginia: Everything You Need to Know
Step 1: Choose a Name for Your Sole Proprietorship
Step 2: Apply for Necessary Licenses or Permits
Step 3: Apply for an EIN
Step 4: Open Business Accounts
Step 5: Obtain General Liability Insurance
Contents
What Is a Sole Proprietorship?
A sole proprietorship is a type of legal entity that’s used to classify a business. In the case of a sole proprietorship, the entity and the owner are not considered different.
This means that someone who earns an income from a business that’s a sole proprietorship is not a separate entity from liability or income. Therefore, they have to pay the full amount of self employment tax, income tax, Medicare, and Social Security taxes. The owner is also responsible for any debts, liabilities, and losses that the company sustains.
You may also know a sole proprietorship as a sole trader and solo entrepreneur.
What’s the Difference Between a Sole Proprietorship and an LLC?
A sole proprietorship and a limited liability company (LLC) differ in a few ways. One of the biggest differences is that a sole proprietorship is only owned by one person and doesn’t come with the liability protection that LLCs come with.
On the other hand, LLCs usually have a few members and have protection against lawsuits and other issues that relate to your personal assets.
Another key difference is that LLCs and sole proprietorships are taxed differently. A sole proprietorship has a single owner that’s liable for all taxes. LLCs can have multiple people responsible for taxes or different taxes to pay based on how the company is structured. This gives you more flexibility as an LLC owner when it comes to taxes.
Overall, a sole proprietorship vs an LLC comes down to liability protection and how the entities are taxed.
What Qualifies as a Sole Proprietorship? Sole Proprietorship in Virginia Examples
Sole proprietorships can be a wide range of business types. It can be anything from a pizzeria to something like a freelance web development company. That said, sole proprietorships are usually businesses that are owned by a single person. Some examples of sole proprietorships in Virginia include:
- People who freelance in Virginia, whether it’s writing, coding, or graphic design
- Accountants
- Tutors
- Photographers
- Personal trainers
- Landscapers
- Bakers
- Barbers
- Consultants
- Financial advisors
Ultimately, any type of business that’s owned and operated by a single person without being an LLC is a sole proprietorship.
Sole Proprietorship Virginia Cost
It’s free to start a sole proprietorship in Virginia. There are no initial startup costs required to start a sole proprietorship in Virginia, and you don’t have to worry about paperwork to file.
You don’t have to worry about any costs because you don’t have to file paperwork like articles of organization or articles of incorporation. Instead, you can start to do business and file 1040 forms for your income.
While it doesn’t cost anything to start a sole proprietorship, you still have to pay taxes. These taxes can vary based on your income, so check your tax bracket and make sure you pay the self employment tax.
How Are Sole Proprietorships Taxed?
Sole proprietorships are taxed at the individual rate. This means that you have to pay taxes on their income and business expenses, so it’s not too different from how you would pay taxes if you were a W-2 employee.
As a sole proprietorship, you pay a percentage of taxes based on your income level in the United States. This means that based on your income level you might have to pay 12 to 22% of your income taxes.
Aside from federal income tax you also have to pay self employment tax. This means you have to pay Medicare and Social Security tax on your earnings, which is 15.3% of your income.
What makes a self employed worker different from a regular worker is how you can reduce your adjusted gross income (AGI). For example, you can write off expenses that you incur during the year.
Some expenses you can write off include your phone bill, WiFi, insurance plans, and even your internet. Meetings, meals, and other expenses can also be write-offs for your company. Always speak with a tax professional before making any write-offs you’re unsure about to avoid legal problems.
Aside from paying federal income tax you also have to pay state income in Virginia. The state income tax rate isn’t too high but it’s something you have to put money aside for. Sole proprietorships taxes also should be paid quarterly to avoid penalties at the end of the year.
A good rule of thumb is to set aside 30% of your income and pay quarterly tax estimates to avoid fees or penalties.
What Are 3 Advantages of a Sole Proprietorship?
The advantages of a sole proprietorship vary based on the type of business that you’re trying to run. For example, you might end up paying less in taxes with a sole proprietorship than if you create a limited liability company. Learn about the three advantages of operating a sole proprietorship below.
Easy to Establish and Dissolve
One of the best parts of a sole proprietorship is that it’s easy to establish. You don’t have to worry about coordinating with other members, and you don’t have to file any paperwork. In fact, if you do business and claim it on your taxes, the IRS considers you to be a sole proprietorship.
Along with being easy to establish, dissolving a sole proprietorship is also simple. All you have to do is stop making an income and reporting that income to the IRS to dissolve a sole proprietorship.
Maximum Privacy
Maximum privacy is another advantage for sole proprietorships. LLCs, corporations, and other legal entities have to file information with the IRS and state. This means that information about LLC owners is public.
When you create a sole proprietorship you don’t have to worry about submitting your information to any registrars. Additionally, you don’t have to worry about sharing information with partners or members of the company because you’re the only one.
Having complete control and privacy is a great way for sole proprietors to run their company out of the public eye.
Lower Costs
One of the biggest benefits of a sole proprietorship is that it doesn’t cost a lot to start one. While LLCs and corporations may have to pay $75 for things like the articles of organization, sole proprietorships don’t have to pay any startup costs. Sole proprietors might also be able to avoid getting a business license as well.
Sole proprietorships also come with some tax advantages. While they’re not tax-friendly for everyone, the biggest advantage is that filing your taxes is simple.
Your taxes are simpler because you don’t have to worry about paying tax on gross receipts or a state corporate tax. Instead, you’re taxed as a Schedule C and only have to worry about paying income tax and self employment tax
What Are 2 Disadvantages of a Sole Proprietorship?
Sole proprietorships are a great option for most single-person businesses. Unfortunately, they’re not perfect. For this reason, it’s important to understand the most common disadvantages of a sole proprietorship in Virginia. Learn more about the 2 disadvantages of sole proprietorships below.
Liability
The biggest disadvantage of a sole proprietorship is the liability. When you’re a sole proprietor without limited liability company protections, you’re liable for everything.
What’s more, you’re liable beyond what the business is making in revenue. For example, if you get sued the court can order you to pay money from your personal accounts or assets to pay the victim.
Liability is also a big problem for sole proprietorships because you also don’t have any partners or other members to split the bill with. Therefore, you have to pay all of the settlement money yourself.
Difficulty With Business Credit and Funding
Another disadvantage of sole proprietorships is the difficulty with business credit lines and funding. When you have a sole proprietorship instead of an LLC or corporation it gets harder to secure funding from banks or investors. Furthermore, you might not be able to get approved for separate credit accounts due to the funds being commingled with your own.
Unfortunately, this problem also gets worse when you’re looking to expand your company. That’s because you’ll have a hard time securing funding for new properties unless you switch to a more traditional business structure.
How to Start a Sole Proprietorship in Virginia
Starting a sole proprietorship in Virginia isn’t difficult, and it’s usually a low-maintenance business entity. Therefore, you can get the business started in a few simple steps. Learn more about each one in detail below.
Step 1: Choose a Name for Your Sole Proprietorship
The first step is to choose a name for your sole proprietorship. If you plan on using your own name and functioning as a freelancer, you don’t have to worry about filing any additional paperwork.
However, if you plan on using a name for your sole proprietorship you’ll need to fill out the necessary forms for a fictitious name. To do this, you’ll need to fill out the Certificate of Assumed Fictitious Name. The form will cost you $10 to fill out and process.
We recommend checking the United States Patent and Trademark Office to see if the fictitious name you want to use is available.
Step 2: Apply for Necessary Licenses or Permits
Plan on selling food or drinks in Virginia? If so, you’ll need a permit or license. You may also need a permit if you plan on operating out of your home.
Advertising permits may also be necessary if you want to place signage on your lawn or around town. Inspections from health inspectors and other formalities may be necessary depending on the type of business that you plan on running.
Step 3: Apply for an EIN
When you have employees as a sole proprietorship, you need to have an employer identification number. Once a sole proprietorship grows to a certain size it might make sense to hire employees and obtain an EIN.
The form can be filled out online via the IRS website. If you don’t want to have employees and want to keep your taxes simple, you can use your Social Security number instead.
Step 4: Open Business Accounts
Next, it’s important to open business accounts. We recommend a line of credit and at least one checking account for your business. These can be personal accounts or business accounts. but you should make sure they’re kept separate from your primary accounts.
This ensures that you don’t have to worry about mixing your funds, which makes bookkeeping and accounting easier.
Step 5: Obtain General Liability Insurance
Since a sole proprietorship doesn’t have liability protection in the same way that LLCs do, we recommend having some type of insurance.
The best insurance for a sole proprietorship is general liability insurance because it will provide you with some level of protection. We also recommend other types of insurance for your business to ensure you have complete protection.
Sole Proprietorship in Virginia FAQ
Have more questions about sole proprietorships in Virginia? We have answers below.
How Do I Become Self Employed in Virginia?
Becoming self employed is simple. To get started, all you have to do is begin earning an income that’s not taxed as a W-2 employee. You can sell things on eBay, drive for companies like Uber, or begin a freelance career.
Regardless of the industry you enter, becoming self employed is as simple as earning money without a primary employer. So, don’t overthink it, and begin your self employed journey in Virginia by offering your goods or services to the public.
Can I Run a Business as a Sole Proprietor?
Yes, you can run a business as a sole proprietor. If you run a business that’s not an LLC or corporation, and you don’t have any partners, you’re running a sole proprietorship by default. You can run businesses of varying sizes as a sole proprietor; it comes down to your preferences.
Once a business grows to a larger size people usually end up changing to a corporation or LLC. Thankfully, the transition is usually simple and we can always help you file the necessary paperwork.
Do You Have to Register a Sole Proprietorship in Virginia?
No, you don’t have to register a sole proprietorship in Virginia. While you can register your Virginia sole proprietorship with the State Corporation Commission if you want to use a DBA for your sole proprietorship, if you want to use your name and Social Security number you don’t have to file anything.
Therefore, whether or not you register your sole proprietorship in Virginia comes down to the name that you want to use for the business. Additionally, you’ll have to register your business if you plan on switching to a limited liability company or corporation.
Can I Be the CEO of a Sole Proprietorship?
Yes, you can be the CEO of a sole proprietorship. The CEO is the chief executive officer of a company and handles the community, a business’s strategy, and any short-term and long-term goals of the company.
That said, most owners of a sole proprietorship don’t call themselves a CEO because CEOs are more common for corporations. This is due to the need to have someone front-facing for investors and public relations. Still, that doesn’t mean you can’t act as a CEO if you prefer to do so.
Sole Proprietorship in Virginia Requirements – Are There Any?
There are no requirements for a sole proprietorship in Virginia. All you have to do is begin doing business to be considered a sole proprietorship.
That said, there are some requirements you need to follow when you’re earning an income as a sole proprietor. The biggest requirement is that you file your taxes and pay them. Failing to do so will result in fines, penalties, and other legal problems.
Do You Need a Business License to Be a Sole Proprietorship in Virginia?
No, you don’t need a business license to function as a sole proprietorship in Virginia. Most sole proprietorships can get by without any form of license or documentation.
However, you will need a business license or permit if you plan on selling food or specific products in Virginia. Therefore, take some time to determine whether or not the industry you plan on working in requires a license of some kind.
Run a Sole Proprietorship in Virginia With Confidence Today
Sole proprietorships in Virginia can be a great way to earn a living. If you don’t want to form an LLC or plan on keeping your operation small, a sole proprietorship might be right for you.
We always recommend starting this way and then expanding to another legal entity if business starts to pick up. This is because it’s easy to establish and dissolve a sole proprietorship if you plan to go back into the workforce.
While a sole proprietorship is a great way to earn a living in Virginia, that doesn’t mean it makes sense for everyone. Some businesses are better off as LLCs or corporations to begin with, so always speak with a lawyer or tax professional when starting a business in Virginia.