How to start a sole proprietorship in Pennsylvania?

Sole Proprietorship in Pennsylvania

Pennsylvania is home to over one million small businesses that are sustainable and rapidly growing in highly advanced and diversified industries. The state is home to eight key industries and several other modern and growth-oriented industry sectors including the energy-evolution. You can start a sole proprietorship in Pennsylvania to serve any of these industries from advanced manufacturing to Food Processing & Manufacturing. The state has a positive business climate that encompasses a strong infrastructure, a low cost of living, a strong transportation and logistics network, a highly motivated and skilled workforce, technology hubs, and a low cost to form sole proprietorship in Pennsylvania online.

What is a sole proprietorship in Pennsylvania?

If you’re wondering how to start a sole proprietorship in PA, then it’s time we gain some insight into what a sole prop really is. A sole proprietorship is also known as a sole trader and it’s quite easy to establish in contrast to a C-Corporation or a limited liability company, as they involve filing several types of paperwork and documentation. If you file a sole proprietorship in PA, then it will be regarded as an unincorporated business, which means that you as the owner will be responsible for any profits earned, and liabilities incurred by the entity. A sole trader business also has a different tax structure and will not be required to file federal or any other forms of taxes.

Pros and cons of sole proprietorship in Pennsylvania

A sole proprietorship is the most basic of all business structures, and for this reason, it is preferred by start-ups and home-based businesses alike. There are several advantages and disadvantages to this type of business structure. Let’s look at the pros and cons to help you determine if this is the right business structure for your startup.

Pros

Each state provides new businesses including a sole proprietorship with benefits and advantages. This particular structure has several benefits available to utilize in this state. Let’s look at the top highlights of forming a Pennsylvania sole proprietorship:

• If you are planning to start a sole proprietorship in Pennsylvania, then one of the biggest advantages is that this type of entity requires minimal formality. It has few Pennsylvania reporting requirements including submission of the formation documents.
• A sole proprietorship has a low starting cost as well as operating expenses. Hence, it is perfect for home-based entities, small retail outlets, and IT consultants among others.
• If you form a sole proprietorship in Pennsylvania online, then a key benefit is not sharing your profits unlike with an LLC or corporation.
• You will be the primary decision-making authority.
• Sole proprietorship taxes are filed under the owner’s income tax return.

Cons

Each business structure type has its own limitations and sole proprietorship has some of the least drawbacks. Let’s look at a few of the disadvantages:

• One of the biggest setbacks for a sole proprietorship is that you will not enjoy any liability protection unlike with an LLC.
• If you file a sole proprietorship in PA, it will be extremely difficult to get business credit and financing through investors.
• Since you’ll be the sole owner; taking holidays or days off can lead to a loss of income during the starting phase.

Steps to Start Sole Proprietorship in Pennsylvania

If you’re wondering how to start a sole proprietorship in PA, there are certain requirements that you need to comply with first. When you form a new company, however big or small, there are some basic areas to focus on, including operations, management, and finance. Apart from this, there are state and business requirements that one needs to fulfill to run a successful company such as business licenses and filing of taxes. Let’s look at the important areas to focus on when starting a sole proprietorship in Pennsylvania.

1. Prepare a business plan

The first step when you’re ready to file a sole proprietorship in PA, is to formulate a strong business plan. The beginning phases of getting your company started will include risks, but following a solid and well-thought-out business plan will lead to long-term rewards. A business plan will help you to identify and mitigate most risks. This type of plan is referred to as a roadmap that takes factors that may impact the business negatively or positively into consideration, such as market challenges and day-to-day operations. This plan is a blue-print for your business operations. It will help you set objectives, maximize resource allocation, and help you make better decisions. Some of the most common features of a sole proprietorship business plan are:

• Executive summary
• Company description and business concept
• Long and short-term objectives
• Product and services
• Target audience
• Competition and market analysis
• Operating plan
• Marketing plan and sales tactics
• SWOT analysis
• Financial plan and projection

2. Choose a Pennsylvania business name

If you are planning to form a sole proprietorship in Pennsylvania online, then one of the first requirements is to choose a business name. The sole proprietorship name will help your company to stand out from the crowd of competition. It will also aid in communicating the objectives of your company, and the nature of the business activity to current and potential clients. The business name will also be the focal point of your entire brand and marketing strategy. Here are some easy tips to follow when choosing a name for your company:

• Follow Pennsylvania state’s naming guidelines
• The chosen name should not be similar to the name of your competitors
• Try to avoid company names that are hard to pronounce or spell
• The chosen name should be easy to remember
• You should consider your target audience when choosing a name
• When you think of a name, make sure that it is appropriate and remains relevant as the business grows and evolves
• Be sure to check the name availability as a domain name for your website
• You can get help from online business name generators for creating short names

3. File fictitious business name

If you want to start a sole proprietorship in Pennsylvania then you need to identify a business name. There are two types of available company name options which include:

• You can use your full legal name as the company name
• You can register a fictitious business name also known as a Pennsylvania DBA

Do you want to start a sole proprietorship in Pennsylvania?

4. Get EIN

When you start a sole proprietorship in Pennsylvania, you will be required to file personal income taxes, as well as state taxes for any other state you do business in. The owner of a sole proprietorship can typically file income taxes using a Social Security Number (SSN), but opting for an Employer Identification Number (EIN) can be highly beneficial. The criteria for applying for an EIN include:

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

5. Obtain necessary licenses and permits

If you are wondering how to start a sole proprietorship in PA, one of the most important aspects to consider is the type of licenses required for your company. The primary objective for licensing for a sole proprietorship is to ensure that such a company is safe for the public, such as the cleanliness in food service establishments or the safety of new medications. If you file a sole proprietorship in PA, you will need the proper licenses and permits to become and remain operational.

• Professional licenses
• Industry or activity based-licenses
• City or County licenses and permits
• Regulated licenses
• Zoning permits

6. Open a bank account for your Pennsylvania business

A sole proprietorship structure is easy to form, but you will need to maintain compliance with all Pennsylvania state requirements to remain operational in the state. Aside from applying for a Pennsylvania DBA, another important requirement is opening a bank account for your business. Although they may look and function similarly, this account will be separate from your personal savings or checking account. The primary advantage of most business bank accounts is to help you manage all of your business finances. If you operate a personal account then you may find that managing personal and business earnings and expenses together can be difficult and confusing. Using a business checking account to keep your funds separate will also help limit your personal liability.

7. Report and pay taxes

In the state of Pennsylvania, different business structures have different tax requirements and they are mostly determined by the entity structure and business activity. If you start a sole proprietorship in Pennsylvania, you will be required to file personal state income taxes at a rate of 3.07%. Apart from this, you may be required to file sales taxes and employer withholding taxes. If your business activity focuses on selling certain products or services, then you will have to submit the PA-100 form (Pennsylvania Enterprise Registration Form). This will provide you with a tax account number for sales taxes, Employer Withholding Taxes, Use Taxes, and Specific products taxes.

Know more about starting a Pennsylvania Sole Proprietorship!

If you’re faced with several queries on how to start a sole proprietorship in PA successfully and how to operate it smoothly, then our “Frequently Asked Questions” is just the section for you. We’ve created this page with you in mind, and the understanding that the right information will enable you to make the best decisions for you and your business.

Do you have to register a sole proprietorship in Pennsylvania?

A sole proprietorship is not considered to be a legal entity structure, so you don’t have to register your company with the Pennsylvania Department of State. However, if you want to file a Pennsylvania DBA, then you will need to file the sole proprietorship DBA form with the Pennsylvania Department of State.

What is the difference between a sole proprietorship and an LLC in PA?

The most fundamental difference in PA between a sole proprietorship and an LLC is that the former is not a legal entity, while the latter is a legal entity registered with the state and governed by the Pennsylvania Consolidated & Unconsolidated Statutes. The biggest dissimilarity between the two entity types is that a sole proprietorship is run by a single owner, while a limited-liability company can have multiple owners. The taxes may vary, although a single-member LLC will be taxed in the same way that a sole proprietorship is taxed. An LLC enjoys limited liability protection, while in a sole proprietorship; the owner will be liable for any debts or claims.

How much is a sole proprietorship in Pennsylvania?

You are not required to file a sole proprietorship in PA with the State Department, hence the starting or initial formation costs are almost negligible. The only applicable costs will be the fees for filing a Pennsylvania DBA ($70), business licenses and permits (variable costs), and your taxes. Apart from this, certain other costs that you may incur would depend on the type of business activity, location, rent, utility bills, and employee salary.

What taxes do sole proprietors pay in PA?

A sole proprietorship and its owner are not seen as different entities and hence personal income tax will be applicable. Other state taxes would also be applicable based on business activity, employees, and location.

Do sole proprietors need a business license in Pennsylvania?

Yes. A business license is required for every entity structure to transact in the state. You will need to apply for your business licenses with the state governing bodies, as well as city or county after you form a sole proprietorship in Pennsylvania online. A sole proprietorship may even be required to obtain professional licenses. You will not be allowed to operate in the state without proper licenses.

Should I convert my sole proprietorship to an LLC in Pennsylvania?

This is an important decision and it should only be made if you’ve done the research, and believe that an LLC suits you better. A limited liability company has several advantages including limited liability, and is also a legal structure. An LLC requires you to maintain certain state compliances that are not required if you start a sole proprietorship in Pennsylvania. You also have the option to start a single-member LLC, it’s run by a single owner and can still enjoy all the advantages of a traditional LLC.

Ready to Start a Sole Proprietorship Business in Pennsylvania

A sole proprietorship is easy to form in Pennsylvania because it is one of the simplest business structures. A sole trader entity is not required to register with the state department, unlike several other business entity types. It’s important to remember that a sole proprietorship has several state requirements that it must fulfill to operate and enjoy good standing in the state, including annual compliances.