How to start a sole proprietorship in Illinois?

Sole Proprietorship in Illinois

The state of Illinois is considered as the national hub for research and innovation. It is home to 34 Fortune 500 companies that have experienced growth in a diverse industry cluster. You can start a sole proprietorship in Illinois and leverage top talent passing out from world-renowned research universities. As an entrepreneur, the expansive business community as well as vibrant startup ecosystem are blessings in disguise. Today, the state is home to 1.3 million small businesses, a large percentage of which are sole proprietorships. When you search sole proprietorship in Illinois for resources, you will be able to access a host of competitive small business incentive programs that aid in business growth and expansion.

What is a sole proprietorship in Illinois?

A sole proprietorship is the most common unincorporated business structure that can be formed within the USA. It requires minimal startup costs and as the name suggests, it’s run by a single individual. This type of company is also known as an individual entrepreneurship or sole-tradership. One of the salient highlights of this type of entity is the use of less state documentation and legal paperwork as compared to a limited-liability company or C Corporation. As a sole proprietor, you will have the flexibility of using your legal full name as a business name or can even choose to use an assumed name or file Illinois trade name. If you start a sole proprietorship in Illinois then you will be able to access state run business incentive and grants programs as well.

Important features of sole proprietorship in Illinois

A sole proprietorship in Illinois is one of the oldest forms of business in the USA and the world. It has a basic and simple structure. It has a different tax structure and you will not be required to file any federal taxes. There are many advantages and a few disadvantages to operating this type of business. This is mostly due to the features of the entity structure. Let’s take a look at some of the top features.

• Control over decision-making is one of the top features of a sole proprietorship. You will be able to manage operations independently and also maintain complete autonomy when it comes to decision-making. This is because it is a single-owner organization.
• When you search sole proprietorship in Illinois tax laws, it will reveal that owners are required to file individual tax returns. You will need to report income and expenses. This helps in avoiding double taxation while enhancing tax efficiency.
• This type of entity is considered the best option for small business owners. This is because the entity structure requires very few setup procedures. You will not be required to face too many regulatory hurdles as well.
• One of the important features is that you are not required to register this type of business, unlike an LLC, corporation, or partnership.
• As a business owner, you will be able to derive maximum incentive from your company. This is because you will not be required to share any of your profits.

Steps to Start Sole Proprietorship in Illinois

If you are wondering how to start a sole proprietorship in Illinois then there are certain state and business-specific requirements that you will need to identify and fulfill. These requirements are mostly related to management, operations, and finance. A sole proprietorship in Illinois can be a home-based business or can be operated from a commercial space like a retail store. As a result, you may need to apply for appropriate licenses or local permits. There are several important areas to focus on as mentioned below.

1. Prepare a business plan

A good business plan can make that all-important difference between success and failure. You may have a brilliant business idea but without proper planning, you will not be able to achieve targeted growth. When talking about a plan, it should be a solution that fits your specific needs. There are several details that are required to be documented in this plan right from the primary objective to future expansion. It should cover operations, product-market fit, competition, finance, and even potential business partnerships. A business plan will also outline other company-related areas like whether the company name should be your legal name or should you file an Illinois trade name. Some of the most common aspects of a sole proprietorship business plan are:

• Executive Summary
• Business concept
• Long and short-term Objectives
• Market analysis
• Operating plan
• Product or Service line
• Organization and Management
• Competition
• Target audience
• Marketing Plan
• Sales Strategy
• Financial Plan and Projection

2. Choose an Illinois business name

If you start a sole proprietorship in Illinois then it is important to identify a strong business name. There are two types of names that this type of entity can choose to operate with. You can use your own legal name (full name) or you can file an Illinois trade name also known as a DBA (doing business as). The name is critical to your business as it will reflect the objectives of your company. The name of your company will be used in marketing and branding collaterals and also for opening a bank account. Hence, it is important to choose the right business name.
Here are some easy tips that you can follow:

• Follow Illinois State’s business name guidelines and rules
• The name you choose should not be similar to that of any competitor
• Try to avoid any names that are hard to pronounce or spell
• You should keep your target audience and business goals into consideration when choosing a name
• You should also search a sole proprietorship in Illinois also known as name availability search
• Check if the chosen name is available for domain name booking for your company website
• You can take help of online business name generators for creating short names

3. File a trade name

If you want to start a sole proprietorship in Illinois then you can use your own name or go with a DBA name. A DBA or doing business as the name is also known as an assumed name, fictitious name, or a trade name. You can choose this type of company name if you are not comfortable using your full legal name. The process of choosing an assumed name is governed by 2023 Illinois Compiled Statutes, Chapter 805 – Business Organizations, 805 ILCS 405/ – Assumed Business Name Act. It is important to note that you can file an Illinois trade name with the office of the County Clerk in the county where you are planning to transact business. Let’s look at an example to understand this.

Example: Your name is Janet Mason and you want to file a sole proprietorship in Illinois as a cake and catering company. It is based in McLean County, IL. You can use your own name like ‘Janet Mason Cakes & Catering.’ Alternatively, you can choose to use a business name like “Janet’s Cakes & Catering”. Here Janet’s Cakes & Catering will be considered as a fictitious business name or Illinois DBA. You will need to conduct a name availability search for this name. If it is available then only you can file an Illinois trade name. You will need to submit the Assumed Name Certificate Intention with the County Clerk’s Office along with a fee of $24.

Do you want to start a sole proprietorship in Illinois?

4. Get EIN

If you start a sole proprietorship in Illinois, you will be required to file personal income tax. You may also be required to file sales tax and any other state taxes. As an owner of a sole proprietorship, you can file your taxes using a Social Security Number (SSN). However, applying for and obtaining an Employer Identification Number (EIN) can be quite advantageous. There are certain requirements that you need to meet to apply for an EIN and they are:

• If a sole proprietorship company hires employees
• If your company plans to open a business bank account
• If you have a Keogh plan
• You are required to file excise tax returns
• If you change or convert the entity structure from sole proprietorship to a partnership or LLC
• If you file Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy

5. Obtain necessary licenses and permits

One of the most important requirements of any form of business is obtaining proper licenses and permits. A business license is a legal document that is issued by a state or government agency. Its objective is to grant permission to a sole proprietorship in Illinois from an operational perspective. This will help you to sell products or provide services within a specific jurisdiction or industry. Obtaining a license or permit also demonstrates that you are compliant with the local laws and regulations. Licensing in the state are categorized as under –

• Sales Tax license or seller’s permit
• Industry or activity specific licenses
• Professional licenses
• City or County licenses and permits
• Federal or Regulated licenses
• Zoning permits

6. Open a bank account for your Illinois business

One of Illinois’s easiest entity structures to form and operate is a sole proprietorship. The standard procedure is to open a business bank account although most individual owner-driven organizations prefer to operate their personal savings account for business purposes. It is recommended to operate a business banking account as it will help separate your personal gains and expenses from those of the company. Thus, it will help manage the business’s financial aspect. When you keep your funds separately in a checking account, it will help limit your personal liability.

7. Report and pay taxes

You know how to start a sole proprietorship in Illinois but in order to maintain active status and enjoy credibility, it is important to ensure compliance with all annual requirements of the state. This is where filing of taxes each year becomes extremely crucial. A sole proprietorship is a single owner entity and hence there is no distinction between the owner and the business itself from a tax perspective. As the owner, you will need to claim profits or losses on your personal tax return. The individual income tax rate in Illinois is flat at 4.95 percent.

Ready to Start a Sole Proprietorship Business in Illinois

A sole proprietorship in Illinois is one of the best forms of business that you can operate. This type of entity is not required to be registered with the state, unlike several other forms of business. However, you will need to obtain appropriate business licenses and fulfill state annual requirements like filing taxes or renewal of licenses.