How to Form a Sole Proprietorship in Maryland
If you want to transform your side hustle or self-employed job into something a little more professional, chances are you’ve looked into forming a sole proprietorship. This is one of the easiest business types to start and is a great solution for many entrepreneurs who want full control. That said, it can be a little confusing at first to set up your sole proprietorship in Maryland, which is why we’ve created this guide to help you out.
Below, we will discuss everything there is to know about starting your Maryland sole proprietorship, including naming your business, necessary registration forms, and federal and state taxation requirements. You can also skip to our FAQ section to get answers to your most burning questions about Maryland sole proprietorships.
Starting Your Maryland Sole Proprietorship
As you start to look into setting up your Maryland sole proprietorship, there are some basic first steps to complete. Keep in mind that unlike other business entities in the state, you will not need to file organizational paperwork or pay extensive fees to get your business set up.
Instead, all you have to do is complete the steps below and then start working; this ease of setup is what makes sole proprietorships such a good choice: it’s ideal for those who don’t want to waste time and want to start working immediately.
It is important to note that the owner of a sole proprietorship assumes all financial and legal liability if something goes wrong with the business — or if the business is sued. Your business income will not be separate from your personal finances, and your personal assets could be at risk in a lawsuit or other negative event if the right precautions aren’t in place (such as insurance).
Name Your Sole Proprietorship
Although you can use your legal name to run your sole proprietorship, it is good practice to adopt a trade name, also known as a “doing business as” (DBA) name. This name will help you establish an image for your business and can familiarize potential customers with what type of business you are running. You can also register for a business bank account with your DBA name, which will help create a sense of reliability with your customers.
There are a few things to keep in mind if you want to obtain a DBA name for your sole proprietorship.
Finding a Unique Name
The trade name that you choose must be unique and distinct from any other business in Maryland. You can ensure this by performing a search with Maryland’s Business Express business entity name search. There are no specific naming rules that you need to follow as long as the name you want is available, then you can claim it.
You can also perform a domain name search to find a matching domain name. A business website that has a matching or similar name to your sole proprietorship’s DBA name will help direct customers to the right place; even if you don’t want a website immediately, purchasing the name ahead of time can save stress when it comes time to set it up.
Register Your DBA Name
After you have selected a unique and available DBA name, you need to register the name with the Maryland State Department of Assessments and Taxation. It is important to note that you cannot use your trade name for your business until you have successfully registered it with the state.
Register your DBA name online through Maryland’s Business Express portal or through the mail by printing out this form, completing it, and sending it to the address below. There is a $25 filing fee for registering your trade name, and you can choose to pay the extra $50 expedited service fee.
If you file your document in person (you can visit the same address below for this), you will automatically be charged the expedited service fee, and your documents will be processed while you wait.
Your trade name will be registered for 5 years before it needs to be renewed. This renewal process can occur during the last 6 months of the current registration. If you don’t renew it once the 5 years have passed, the DBA name will be released for others to potentially claim.
Charter Division
Department of Assessments and Taxation
301 W. Preston Street, Room 801
Baltimore, Maryland 21201
Obtain Business Licenses and Permits
While you won’t need a general business license when running a sole proprietorship, you may be required to obtain local operating permits or licenses based on the type of business you are running.
You can browse professional and organizational licenses using the Maryland One Stop portal to see what type of license your business may need. You should also check with the Clerk of the Court’s office in the area where your business is located to ensure you are meeting city and county-level permit requirements.
If you determine that your sole proprietorship will need a license or permit, you first need to register your business online through the Maryland Department of Assessments and Taxation before applying for any applicable licenses. You can also register your business for various tax and insurance accounts through this portal. More in-depth instructions on this process can be found here.
Keep in mind that if you hire a professional to work in your sole proprietorship, they need to meet all state and federal licensing requirements that apply to the type of service they offer.
Additionally, you may need to obtain licenses and permits on a federal level. Again, this depends on the type of business that your sole proprietorship is involved in. For help determining whether you need to acquire federal licensing, check out this guide on the U.S. Small Business Administration’s website.
Understand Taxation Requirements
Understanding the taxation requirements for your sole proprietorship is an essential step in setting up your business. Because you are assuming all the financial responsibility and legal liability in running a sole proprietorship, it is important that you meet all federal and state tax requirements to avoid major penalties and risks to your personal assets.
Federal Taxation Requirements
When running a sole proprietorship, all your business profits and losses will be taxed directly to you as part of your individual income tax return (Form 1040). When filing your Form 1040 with the IRS, you need to include Schedule C. Schedule C is the form where you report all your business expenses, losses, and profits.
In addition to paying income tax on your business profits, you are also liable to pay self-employment tax to the IRS. This tax rate is 15.3% and covers both social security and Medicare tax. Typically, an employer would contribute to part of this percentage for you, but as you are self-employed, you will be liable for the full tax amount yourself. Your self-employment tax will be reported on Schedule SE and filed as part of your 1040 income tax return.
It’s likely that you also need to pay estimated taxes throughout the year to the IRS. Estimated taxes are not separate; they are simply payments towards what you think you owe at the end of the year. If you are excepting to owe a large amount of money each year, you must make estimated taxes to avoid fines when filing your annual income tax return.
Estimated payments are due 4 times a year in January, April, June, and September. You can use this form to figure out your estimated tax payment amount and you should be sure to pay by each quarterly deadline. Payments can be made online directly through the IRS website. Overpayments and underpayments of estimated taxes will be reconciled on your annual tax return at the end of the calendar year.
State Taxes Requirements
Maryland does require that residents pay state income taxes: as a sole proprietorship, any income that you gain from your business is reported on your individual income tax form with the state. You can access individual income tax forms through the Comptroller of Maryland’s website.
You need to make estimated tax payments in Maryland if your annual income is expected to be above a certain level. More information about this can be found through the Comptroller’s office here, where you can also access an estimated tax calculator and information on filing your estimated payments.
If your sole proprietorship sells any type of goods and services, you may be liable to pay for sales and use tax with Maryland. This tax can be registered for and paid through the Maryland Comptroller here.
Additionally, if your sole proprietorship is hiring employees, you may need to pay withholding taxes and unemployment insurance taxes (this also needs to be paid on a federal level). Both types of taxes can be registered for through the Maryland Business Express portal online.
Acquire an EIN
As a sole proprietor, you only need to obtain an Employer Identification Number (EIN) if you are hiring employees. The EIN will be used to identify your business to the IRS as you pay any kind of federal tax. If you are the only member of your business, you are not required to obtain an EIN but you may want to apply for one due to privacy reasons. You can use the EIN instead of your social security number on certain tax documents and for business bank account and loan applications.
It is free to request an EIN through the IRS. You can file your application online by visiting the IRS website (this is the quickest way, and you will receive your EIN immediately after filing), or you can print out this form and mail it to the address below.
Internal Revenue Service
Attn: EIN Operation
Cincinnati, OH 45999
Keeping Your Sole Proprietorship Running
Even after you have obtained your DBA name and understood the tax requirements for your sole proprietorship, there are still things you need to keep up with to ensure your business stays running without issue.
File Personal Property Tax Returns
Every sole proprietorship in Maryland that owns, leases, rents, uses, or borrows business personal property (or needs a business license) must file a personal property tax return annually. The return is due by April 15th of each year; more instructions on filling the form can be found here.
How much you owe after filing this document depends on your business’s property assets and any deductions that you are eligible to claim.
You can file your personal property tax return online through the Maryland Business Express portal or you can print out this form and mail it to the address below.
If you fail to file your return, you risk being charged late penalties and taxation fines from the Maryland government.
Maryland State Department of Assessments and Taxation
Business Personal Property Division
P.O. Box 17052
Baltimore Maryland 21297
Make Estimated Tax Payments
As we mentioned above, it is important to keep up with both federal and state estimated tax payments. This is done to avoid a large tax bill at the end of the calendar year, which only results in penalties and fines from both the IRS and the Maryland state government.
Separate Your Business Finances
Even though your sole proprietorship is connected to your personal assets when it comes to legal issues, you can separate out some of your finances to keep better track of them. This is especially helpful if you want to apply for any type of business loan or financing and if you are calculating all your taxes yourself.
When applying for a business bank account, make sure you have either your social security number or EIN on hand. You can register for bank accounts and business cards using your DBA name — something that also helps build up trust between you and your customer base.
Purchase Business Insurance
Because you are solely responsible for all tax and financial burdens in a sole proprietorship, it is a good idea to purchase business insurance. This will protect your personal assets in the case of accidents in your business, property damage, or cases of negligence. You can opt for either general liability insurance or professional liability insurance. More information on business insurance types can be found here.
Consult With a Financial Advisor
Running a sole proprietorship can be confusing, especially when it comes to understanding taxes and organizing your finances. It can be a good idea to consult with a professional accountant or a financial advisor while establishing your business on an ongoing basis to ensure you are meeting all tax requirements and avoiding any major issues or taxation penalties.
Sole Proprietorship FAQs
These FAQs below can answer any lingering questions you have about starting a sole proprietorship in Maryland.
What Is the Difference Between a Sole Proprietorship and a Single-Member LLC?
The main difference between a sole proprietorship and a single-member LLC is that with an LLC, you can further protect your personal assets in the case that your business is sued.
You are also not personally liable for any debts accrued by your LLC the same way you would be with a sole proprietorship. That said, it costs more to form an LLC in most states, and it takes longer than starting a sole proprietorship, which can be established almost immediately.
If you want to read more on the differences between sole proprietorships and single-member LLCs, check out this article.
How Much Does It Cost to Start a Sole Proprietorship in Maryland?
In Maryland, it doesn’t cost you anything to start a sole proprietorship if you are not using a DBA name. You can simply start running your business without filing any formal organizational documents.
However, if you want to use a DBA name, it will cost $25 to file the applicable form, with the option of paying an additional $50 expedited fee. And, depending on your business, you may need to pay certain licensing and permit registration fees before operating your sole proprietorship.
How Long Will It Take to Form a Maryland Sole Proprietorship?
It does not take long to form your sole proprietorship in Maryland. If you aren’t registering a DBA name, you can begin operating your business immediately. If you are registering a name, it can take a couple of days for online processing of the form or up to a week for mail processing.
If you choose to file your DBA name registration in person, your sole proprietorship can be formed in a matter of hours.
Do Maryland Sole Proprietorships Need to File State Reports?
Maryland sole proprietorships do not need to file state reports, but most will need to file annual personal property tax returns. This return is due by April 15th of each year and can be filed online or through the mail.
How Much Will Your Maryland Sole Proprietorship Pay in Taxes?
How much your sole proprietorship pays in taxes depends on your business’s profits and losses. You pay income taxes on any money you take in from your business, both federally and on a state level. You may also be liable to pay self-employment taxes, employer taxes, and sales and use taxes.
Will Your Sole Proprietorship Need an Operating Agreement?
In most cases, your sole proprietorship does not need an operating agreement. This document is not required for businesses by the state of Maryland, but it may be a good idea to create one anyway. The operating agreement establishes the terms of how your business is run and can prove that your sole proprietorship is a legitimate business to banks or lenders when it comes to securing business financing.
How Do You Dissolve a Maryland Sole Proprietorship?
If you are done conducting business with your sole proprietorship, there is not too much you need to do to dissolve it. You must notify the IRS and any relevant Maryland tax departments that your business is concluding, in addition to filing a Trade Name Cancellation Application.
This form carries a $25 filing fee (with an optional $50 expedited filing fee) and releases the DBA name for your business back into availability for others to use.
You should also consult with an accountant or financial advisor to figure out the best way to tie up any loose ends regarding debts, business credit accounts, taxes, and loans for your sole proprietorship.
Maryland Sole Proprietorship Resources
The below resources can help you through each step of setting up and running your sole proprietorship in Maryland.
- Available DBA name search
- Available domain name search
- Register your DBA name online
- DBA name printable form
- Maryland Business Express
- Maryland One Stop portal
- Maryland Clerk of the Court information
- U.S. Small Business Administration
- IRS Schedule C
- IRS Schedule SE
- IRS estimated payments information
- Maryland individual income tax information
- IRS EIN online application
- Personal property tax return instructions
- Personal property tax return form