How To Register A Sole Proprietorship In Colorado

Sole Proprietorship in Colorado

Sole means ane. And Proprietor means owner. Put them together and you have a Sole Proprietor, or Sole Proprietorship. A Sole Proprietor is the person. A Sole Proprietorship is the business entity.

A Sole Proprietorship in Colorado is an breezy construction with one business owner. Often, information technology is the easiest and simplest form of concern structure to create. Even so, that doesn't always mean they are the best pick for small business organisation owners.

While Sole Proprietorships have some advantages, there are too disadvantages you should be aware of.

We've explained these below, too as provide step-by-footstep instructions if you lot decide to kickoff a Sole Proprietorship in Colorado.

Pro tip: Sole Proprietorships don't protect your personal assets. On the other hand, if you form an LLC, your personal avails are protected in the event of a lawsuit. Check out Sole Proprietorship vs LLC for more than information.

Advantages of a Sole Proprietorship

Ease of setup and maintenance

The primary advantage of a Sole Proprietorship is how easy they are to gear up and to maintain.

In fact, there is no form to file in order to "create" one. If you're doing concern by yourself, you lot're operating as a Sole Proprietorship.

Remember of information technology this way: in one case you lot engage in business activities, with the goal of eventually making money, you are operating as a Sole Proprietorship.

For example, if you desire to first a wedding planning business, the moment yous begin doing business research, calling potential customers, or building your website, y'all're operating as a Sole Proprietorship.

Tax

The 2d advantage of a Sole Proprietorship is taxation. Filing taxes for a Sole Proprietorship business is very similar to how you already file your individual taxes.

Significant, yous already file a personal Course 1040 taxation return each yr. However, as a Sole Proprietorship you (or your accountant) will include a Schedule C which lists your business profits or losses.

Disadvantages of a Sole Proprietorship

There is one major disadvantage and a few other pocket-sized disadvantages of a Sole Proprietorship.

No liability protection

The main disadvantage of a Sole Proprietorship is liability protection: at that place is none.

If your business is sued, your personal avails (similar your home, cars, and bank account) could be used to settle the concern's debts and liabilities.

On the other hand, if you formed an LLC or a Corporation, your personal avails are protected in the event of a lawsuit. Simply the business'southward assets can exist used.

Tip: LLCs offer boosted asset protection that Corporations don't.

Lack of credibility

Even though you can file a DBA name (discussed below), Sole Proprietors are still often seen as being less credible.

On the other hand, if y'all were to grade a legal business organization entity, similar an LLC or Corporation, those are considered more official and reputable.

Converting from a Sole Proprietorship to an LLC

If you beginning your Colorado business as a Sole Proprietorship, and then afterward desire to convert to an LLC or Corporation, it'southward a large headache with many steps involved.

There isn't a one-step process to convert a Sole Proprietorship to LLC. In fact, there are often multiple steps and multiple filings you lot must make with various state departments and local governments.

For example, you demand to update the land, the IRS, and the bank that your business type has changed. And if your business organisation requires a license or allow to operate, you will need to re-apply for those as the new business organization. Yous may also need to redo contracts with your clients and vendors, and update your website and marketing materials.

So if you lot're on the contend well-nigh which blazon of Colorado business to cull, and you have the coin to spend on an LLC, nosotros recommend starting an LLC in Colorado.

Sole Proprietorship vs LLC

Quick Read: What is an LLC and what does it do?

A Limited Liability Company (LLC) is a legal entity that offers pass-through revenue enhancement and nugget protection. If your LLC is sued, your personal assets – like your dwelling house, car, and personal bank business relationship – are protected.

An LLC with one possessor is called a Unmarried-Member LLC. And the great thing nearly them is they are taxed but the same as a Sole Proprietorship. Bank check out LLC taxed every bit Sole Proprietorship for more than details.

To start an LLC in Colorado, y'all must file a Certificate of Germination with the Secretarial assistant of Land and pay a $fifty filing fee.

LLCs must as well pay an LLC annual fee and appoint a Registered Agent in order to stay in compliance.

If you want to rent a company to class your LLC, we recommend Northwest Registered Amanuensis.

If y'all decide yous'd rather operate as a Sole Proprietorship, we have the instructions below.

How to start a Colorado Sole Proprietorship

The only thing you must practice to start a Sole Proprietorship in Colorado is simply decide to offset.

Over again, just past taking actions that may atomic number 82 to making coin ways that you lot're now a Sole Proprietor. You don't have to file a document to "form" your Sole Proprietorship with the state.

Yet, there are a few things you may need to (or want to) practise in order to operate legally. For case, your business may need a license or let to operate.

And it's best practice to open up a separate business organisation banking company account.

You might also want to get a DBA (for branding), and an EIN Number (so y'all aren't putting your social security number on invoices or contracts).

Nosotros'll walk you through each of these steps below.

Stride i – Business Planning Stage

Once you have a business idea and have decided to operate as a Sole Proprietor, it'south a good thought to found some key components of the business.

Some things that are helpful to remember about are:

business model
business name
startup costs
industry
marketing ideas
business address

Your business model is how your Sole Proprietorship plans to make money – what volition you sell, how it's made, how it's delivered, how it'south marketed or advertised, etc.

It's a good idea to think of marketing ideas early to help your business concern succeed. A good marketing plan tin can include developing a logo and brand name, deciding where to advertise, building a website, and developing a social media strategy.

You should likewise choose a main business address. This tin can be an actual office address, but it doesn't have to be. Information technology could be your home accost or yous could even rent a mailbox address. The purpose is to have one designated address where all mail for the business is sent, and that yous can employ on official documents.

Pace 2 – Name your Sole Proprietorship and Obtain a DBA

Now that y'all've washed some concern planning, you have the selection to proper noun your company.

By default, a Sole Proprietorship's name is the possessor's legal proper name. All the same, if you lot'd rather do business organization nether a different name, you can file a DBA name (Doing Business Every bit name).

For example: Felipe Cruz is starting a wedding planning business organization. Instead of having to do business under his full proper name – Felipe Cruz – he'd like to do business nether the name "Excellence in Events". In this case, he'll demand to register his DBA proper name "Excellence in Events".

Having a DBA proper noun can get in a lot easier to brand and market your business. It can also make your business sound larger than a i-person business.

Having said that, a DBA proper name is not required for a Sole Proprietorship in Colorado. If you'd rather do concern under your outset and last name, that is 100% okay.

However, Colorado requires y'all to register a Trade Proper name if your Sole Proprietorship is using any name other than your first and concluding name. This rule is plant at Department 7-71-101 of the Merchandise Names Law.

Note: In Colorado, a DBA is technically called a Trade Name, however, they mean the same matter.

How practice I get a DBA?

To register your DBA (aka Merchandise Name) in Colorado, you lot'll need to submit a Statement of Trade Name of a Not-Reporting Entity and pay a $20 fee.

Note that this is a different form than what a Corporation or LLC would use in Colorado, so make sure you download the right one.

Need to relieve fourth dimension? We recommend hiring MyCompanyWorks ($99 + country fee) to file your DBA.

Step 3: Go an EIN from the IRS

By default, a Sole Proprietor uses their Social Security Number (SSN) for tax and financial reporting.

However, a Sole Proprietor also has the pick of getting an EIN Number (Employer Identification Number) from the IRS.

Notes: Whether or not yous go an EIN for your Sole Proprietorship will non impact your taxes. Your taxes will be filed the aforementioned either way.

An EIN is likewise called a Federal Taxation ID Number, Federal Employer Identification Number, Employer Identification Number, or FEIN. They all hateful the same thing.

Getting an EIN for your Sole Proprietorship may be a good idea for a few reasons:

Rubber (forbid identity theft)

Without an EIN, you may need to apply your SSN when dealing with vendors and clients. For instance, if a client pays yous more than than $600 per twelvemonth, y'all'll need to provide them with IRS Grade W9.

Instead of using your SSN, yous tin list your EIN instead on Form W9.

The aforementioned thing can also apply to online account setups and other places you may exercise business concern with.

Past using your EIN, you don't have to give out your SSN as much.

Hiring employees

In this case, an EIN isn't optional; it'southward required. If you lot desire to hire employees for your business concern, yous will need to obtain an EIN first. This is because an EIN is required in gild to pay payroll taxes for your employees.

Note: Equally a Sole Proprietor, while y'all are considered cocky-employed, you are technically not an employee.

Step 4 – Inquiry business license requirements

When researching required business organization licenses, information technology's a proficient idea to check if there are state-level requirements. Later doing then, you'll want to research any local requirements, those enforced past the county or city where you're doing business organisation.

Good news, Colorado doesn't require a "general" business license at the land-level for Sole Proprietors. So there's nothing to do for this stride.

Still, depending on your industry, and where you're doing business, you may need an industry-specific license or a license issued by your municipality (ex: canton or city).

To learn whether you demand industry-specific or other country licenses, you can consult the Colorado Department of Regulatory Agencies Business License page.

You should also cheque with your county and urban center clerks about local license requirements. The Colorado County Clerks Association has a page of all Colorado Canton Clerk Websites.

Tip: Save fourth dimension by hiring an expert. Nosotros recommend using IncFile ($99) to handle the business concern license enquiry for you.

Stride five – Maintain your business concern

One time you have established your Sole Proprietorship, there are a few things to do in social club to go along it in proficient working order.

Getting a business bank account, maintaining business fiscal records, and filing taxes are all part of making your business organization run smoothly.

Business organization Bank Account

It's important to open a business bank account for your Sole Proprietorship.

Keeping business concern finances separate from personal finances is an important function of operating a business safely.

Business organisation depository financial institution accounts typically permit you to procedure more than transactions per month than a personal bank account, and have other benefits.

Some banks may crave a DBA in order to open a business bank account for a Sole Proprietor. Nosotros recommend calling the bank to run across if a DBA is required or if you can open the business account in your own name.

While you're on the phone, it'south likewise a good idea to enquire about the products they offer, and what documents they require.

For instance, most banks require you lot to bring your photo ID, and if you have them: your EIN Confirmation Alphabetic character and DBA filing.

Business organization Records

Well-nigh states crave that businesses continue certain records. There is no police specifically governing Sole Proprietorships, however, it's a expert idea to keep the following records for your Sole Proprietorship:

Copies of revenue enhancement returns for the previous three years
Copies of whatsoever financial statements for the previous three years

If you're just starting out, you won't have these records right away, and that's okay. But keep them saved and organized as time goes on.

We recommend establishing a specific location to store the records. For example, a filing cabinet in your house or at the concern'south part location. Or an online deject storage arrangement where yous scan and relieve all the documents.

File your taxes (or hire an accountant)

Equally mentioned in a higher place, when operating as a Sole Proprietor, you'll report your business profits or losses on your personal tax return.

While y'all can file your taxes yourself (using a software similar Turbotax), you may want to hire a professional instead.

If so, we recommend that y'all rent a business concern accountant. Check out our guide on how to choose an accountant.

Decision

While a Sole Proprietorship may seem easier and less expensive than starting a legal entity (like an LLC), it tin can be risky (no nugget protection) and still requires paperwork for a DBA proper name and business license.

In general, we don't see many practiced reasons to operate as a Sole Proprietorship and we don't recommend them. They merely accept disadvantages when compared to legal entities.

The exception to this would exist if you really don't take money to pay for an LLC, especially if your state has expensive fees. For some, a Sole Proprietorship may be the only option to getting your business off the basis and earning profit. In this scenario, a Sole Proprietorship can be a good place to starting time.

If y'all'd like to learn more than well-nigh LLCs, cheque our our guide on Starting an LLC in Colorado.

Colorado Sole Proprietorship FAQs

What is better LLC or Sole Proprietorship?

While starting a Sole Proprietorship is easy, the advantages end there.

Sole Proprietorships offer no personal asset protection. If your business is sued, yous're personally liable for the business debts and obligations. On the other hand, if you class an LLC, your personal assets are protected if your business is sued.

Sole Proprietors are also seen as less official and less legitimate than a formal entity like an LLC.

We recommend forming an LLC instead of a Sole Proprietorship. Non only does it offering personal nugget protection, just they are more credible, and there's no difference between how you file taxes for a Sole Proprietorship and an LLC.

How exercise I make myself a Sole Proprietorship?

There is no grade to file to first a Sole Proprietorship. Simply by engaging in activities with the goal of making money, you are operating as a Sole Proprietor.

However, if you'd like to do business organization under a name likewise your first and last name, you'll demand to register a DBA (Doing Business As) Name.

Are Sole Proprietorships required to register in Colorado?

You don't have to annals your Sole Proprietorship with the Colorado Secretary of Land. Information technology but exists one time you decide to commencement a concern and engage in business concern activities.

However, if your Sole Proprietorship volition utilise a DBA (aka Trade Proper noun), and so that needs to be filed with the Colorado Secretarial assistant of State.

Additionally, you should check with an accountant in Colorado near whether your Sole Proprietorship needs to register with the Colorado Department of Revenue for things like sales tax or other types of taxes.

Can a DBA be a Sole Proprietorship?

A DBA isn't a Sole Proprietorship. A DBA is just a "nickname" for something else – whether that'south a business organization or person(s).

Having said that, your Sole Proprietorship can do business using a DBA (doing business organisation every bit) proper name.

For example, the default proper noun for a Sole Proprietorship is the kickoff and last name of the owner (like: Bob Barkley). Withal, if y'all're running a bagel shop, you tin file a DBA chosen "Bob's Bagels & Sandwiches" in order to ameliorate brand and market your business.

How are Sole Proprietorships taxed?

Any profit or loss from your business organization is reported on a Schedule C with the Internal Revenue Service (IRS).

And the Schedule C is included with the rest of your personal revenue enhancement return (Form 1040).

What's the difference between a Sole Proprietorship and a Partnership?

A Sole Proprietorship is an informal business structure with one owner.

A Partnership, aka General Partnership, is an breezy business construction with 2 or more owners.

While both structures take pass-through taxation, a Partnership needs to file Form 1065 at taxation time, while a Sole Proprietorship doesn't. Instead, a Sole Proprietor needs to include a Schedule C on their personal revenue enhancement return.

Matt Horwitz

Founder & Educator, LLC University®

Matt Horwitz has been the leading adept on LLC education for the past decade. He founded LLC University in 2010 after realizing people needed simple and actionable instructions to beginning an LLC that other companies weren't offer. He's cited past Entrepreneur Mag, Yahoo Finance, and the US Chamber of Commerce, and was featured by CNBC and InventRight.

Matt holds a Bachelor's Caste in business from Drexel University with a concentration in business organisation law. He performs extensive research and analysis to convert state laws into uncomplicated instructions anyone can follow to form their LLC - all for complimentary! Read more most Matt Horwitz and LLC University.