How to start a sole proprietorship in Colorado?

Sole Proprietorship in Colorado

A report by the Small Business Administration (SBA) reveals that Colorado is home to more than 600,000 small businesses and a large number of these entities are sole proprietorships. This is because a first time business owner finds a sole proprietorship in Colorado as a comfortable to operate entity because it lacks the extensive paperwork of a corporation or the multiple decision makers in a limited liability company. If you search for a sole proprietorship in Colorado, you will find this type of entity exists and operates in almost all industries right from home based bakeries to larger food establishments and tour operators. Sole proprietorships can be easily formed and operated within some of the top industries in the state including scientific, construction, retail trade, and technical services industry.

What is a sole proprietorship in Colorado?

It is important to inform oneself on how to start a sole proprietorship in Colorado before you actually start investing in your startup. This type of business entity constitutes several areas that most first time business owners are unaware of. A sole proprietorship is known as an unincorporated entity, which is owned as well as operated by a single person. This type of entity is also known as a sole tradership or individual entrepreneurship. Some of the examples of such an entity are graphic designers, software designers, programmers, photographers, travel journalists, bakery, dental clinic, and pharmacy among others. It is easy to form a sole proprietorship in Colorado as this type of entity has salient advantages over various other types of entities with respect to formation, finances, taxes, and documentation.

Important features of sole proprietorship in Colorado

If you are planning to start a sole proprietorship in Colorado then this is the most basic of all types of entity structures. It is also the oldest type of entity formed and operated in the world and is owned, managed, as well as controlled by an individual or a single person. When you search sole proprietorship in Colorado, you will gain insight on the fact that this type of entity has several remarkable features. Let’s look at some of them

• Ease of formation and Closure – One of the most important features of a sole proprietorship is that it is easy to form. All you have to do is file a Colorado trade name and obtain the necessary licenses. You are not even required to register this type of entity with the State of Colorado. Similarly, it is easy to close a sole tradership business. If you want to dissolve your business at any point in time then unlike corporations and LLC’s, you will not be required to file any articles of dissolution or closure.
• Liability – When you form a sole proprietorship in Colorado, you will be responsible for all debts. Whether you have taken a loan for the business or a personal loan, either ways, you will be responsible for paying off the loan. This can be an advantage as well as a disadvantage.
• Profit or loss – One of the key aspects of a sole proprietorship business is that profit and loss will not be shared. If your company earns a profit then that will belong to the owner and the same rule stands for losses incurred by the company.

Do you want to start a sole proprietorship in Colorado?

Steps to Start Sole Proprietorship in Colorado

If you are wondering how to start a sole proprietorship in Colorado then there are several processes that you need to focus on. These processes are associated with the formation of a new business as well as making it operational. This also includes fulfilling state annual maintenance requirements, which every new company in the state has to be compliant with. Let’s look at the various important processes and steps involved.

1. Prepare a business plan

Whether you start a small business or a large company, one of the very first requirements is that of a comprehensive business plan. It needs to be a carefully thought-out plan as it will lay the foundation for how to start a sole proprietorship in Colorado while ensuring key business objectives are also well laid out. A good business plan will incorporate strategic actions regarding current and future goals while creating a roadmap. It will also take into account various factors that play a key role towards making your sole proprietorship growth oriented and profitable.

• Executive Summary
• Company Description
• Long and short-term Objectives
• Competition Analysis
• Market analysis
• Product and Services
• Target audience
• Operating plan
• Marketing Plan
• Financial Plan

2. Choose a Colorado business name

If you want to form a sole proprietorship in Colorado then it is one of the simplest business structures. However, you will not be able to establish a company without a proper business name. You can always start by using your legal name as the business name or trade name. The importance of the name not only lies with forming a company but also plays a key role in other aspects like sales, marketing, branding, domain name for website, and opening a bank account among others.

• Try to choose a name that is easy to spell and remember
• Identify a name that is not similar to that of your competition
• Follow the Colorado naming rules and guidelines
• Take help from online business name generators like Namelix, BrandCrowd etc.
• You can use your legal name (e.g. – Susan White Cafe)
• You can choose to file a Colorado trade name
• Try to secure trademark protection for your chosen business name

3. File a trade name

If you have taken a decision to not use your legal name then the option is to file a Colorado trade name. A trade name is also known as a fictitious name or a DBA (doing business as) name. It is any name other than the legal name of the owner. When you choose such a name, you are not required to include any additional words, phrases, or abbreviations like corporation, LLC etc. Let’s look at an example to understand this.

4. Get an EIN

If you are wondering how to start a sole proprietorship in Colorado then one of the important steps would be to apply for and obtain a proper tax ID. Tax ID’s are mostly required by new and existing businesses for filing of federal and state taxes. Generally, a sole proprietorship in Colorado can file individual income taxes using the Social Security Number (SSN) of the owner. You may need to apply for an Employer Identification Number (EIN) with the IRS (Internal Revenue Service) by filing form SS-4, if you meet any of the following requirements:

• If your company starts hiring employees
• If you open a business bank account
• When the owner has a Keogh plan
• The state of formation requires filing of excise tax returns
• When you change the entity structure from a sole proprietorship to a limited-liability company
• Filing of Chapter 7 (liquidation) or Chapter 11 (reorganization) bankruptcy

5. Obtain the necessary licenses and permits

If you are wondering how to start a sole proprietorship in Colorado then one of the key areas related to operating your company is the type of licenses that you may need. The licensing regulations for a sole proprietorship business will be quite similar to that of any other form of entity including corporations and LLCs. The type of license required when you start a sole proprietorship in Colorado will vary according to the profession, location, and the business activity. The most common licenses applicable would be:

• Professional or occupational License
• Sales tax license
• Regulatory licenses
• Municipal or county licenses
• Zoning permits

6. Open a bank account for your Colorado business

If you form a sole proprietorship in Colorado then it becomes necessary to separate your personal income from the income you derive from your business. This is where opening a business bank account can be quite beneficial. One of the top advantages of a separate bank account for the company is that it will help create a distinction between personal and business-related expenses especially when it comes to filing taxes. It will aid accurate bookkeeping and analytics while boosting your business credibility.

7. Report and pay taxes

When you search a sole proprietorship in Colorado for taxes, the most important would be the individual income tax. Since, this type of entity is a single owner entity, all profits and losses for the company will be included in the individual tax return of the owner. The state individual income tax rate is a flat 4.40 percent in Colorado. Apart from this, you may be required to file sales and use tax depending on the primary business activity. If you hire employees then you will have to file withholding taxes as well.

Ready to Start a Sole Proprietorship Business in Colorado

If you have already decided to form a sole proprietorship in Colorado then there are several advantages of this type of entity. You can enjoy numerous state benefits including participating in income tax credit programs. You will not be required to register your company with the Secretary of State unlike for LLCs and corporations. However, you will be required to maintain compliance as far as state annual requirements are concerned as this will help you to enjoy a good standing with the state.