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What is a Massachusetts Sole Proprietorship?
A Sole Proprietorship in Massachusetts is an informal business structure owned by one person.
And the business owner is called the Sole Proprietor.
Sole Proprietorships are often the easiest and simplest form of business to create. However, that doesn’t always mean they are the best choice for small business owners.
While Sole Proprietorships have some advantages, there are also disadvantages you should be aware of.
We explain the pros and cons below, and provide step-by-step instructions if you decide to start a Sole Proprietorship in Massachusetts.
Pro tip: Sole Proprietorships don’t protect your personal assets. On the other hand, if you choose a more formal business structure, like an LLC, your personal assets are protected in the event of a lawsuit. Check out Sole Proprietorship vs LLC for more information.
What are the advantages of a Massachusetts Sole Proprietorship?
Ease of setup and maintenance
The primary advantage of a Sole Proprietorship is how easy they are to set up and to maintain.
In fact, there is no form to file in order to “create” one. If you’re doing business by yourself, you’re operating as a Sole Proprietor.
Think of it this way: once you engage in business activities, with the goal of eventually making money, you are operating as a Sole Proprietorship.
For example, if you want to start a wedding planning business, the moment you begin doing business research, calling potential customers, or building your website, you’re operating as a Sole Proprietorship.
File business taxes using your personal tax return
The second advantage of a Sole Proprietorship is how they are taxed. Filing taxes for Sole Proprietors is very similar to how you already file your individual taxes.
Meaning, you already file a personal Form 1040 tax return each year. However, as a Sole Proprietorship you (or your accountant) will also include a Schedule C which lists your business profits or losses.
What are the disadvantages of a Massachusetts Sole Proprietorship?
There is one major disadvantage and a few minor disadvantages of a Sole Proprietorship.
No liability protection
The main disadvantage of a Sole Proprietorship is liability protection: there is none.
If your business is sued, your personal assets (like your home, cars, and bank account) could be used to settle the business’s debts and liabilities.
On the other hand, if you formed an LLC or a Corporation, your personal assets are protected in the event of a lawsuit. Only the business assets can be used to settle the business’s debts and liabilities.
Tip: LLCs offer additional 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, you could choose one of the more formal business structures (like an LLC or Corporation), which are considered more official and reputable.
Converting from a Sole Proprietorship to an LLC
If you start your Massachusetts business as a Sole Proprietorship, and then later want to convert to an LLC or Corporation, it’s 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 must make with various state departments and local governments.
For example, you need to update the state, the IRS, and the bank that your business type has changed. And if your business requires a license or permit to operate, you will need to re-apply for those as the new business. You may also need to redo contracts with your clients and vendors, and update your website and marketing materials.
So if you’re on the fence about which type of Massachusetts business to choose, and you have the money to spend on an LLC, we recommend starting an LLC in Massachusetts.
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 taxation and asset protection. If your LLC is sued, your personal assets – like your home, car, and personal bank account – are protected.
An LLC with one owner is called a Single-Member LLC. And the great thing about them is they are treated the same as a Sole Proprietorship for tax purposes. Check out LLC taxed as Sole Proprietorship for more details.
To start an LLC in Massachusetts, you must file a Certificate of Organization with the Corporations Division and pay a $520 filing fee.
LLCs must also pay an LLC annual fee and appoint a Registered Agent in order to stay in compliance.
If you want to hire a company to form your LLC, we recommend Northwest Registered Agent.
If you decide you’d rather operate as a Sole Proprietor, we have the instructions below.
How to Start a Sole Proprietorship in Massachusetts
All you have to do to start a Sole Proprietorship in Massachusetts is simply decide to start.
Just by taking actions that may lead to making money means that you’re now a Sole Proprietor. You don’t have to file a document to “form” your Sole Proprietorship with the state.
However, there are a few things you may need to (or want to) do in order to operate legally. For example, your business may need a license or permit to operate.
And it’s best practice to open a separate business bank account.
You might also want to get a DBA (for branding), and an EIN Number (so you aren’t putting your social security number on invoices or contracts).
We’ll walk you through each of these steps below.
Step 1 – Business Planning Stage
Once you have a business idea and have decided to operate as a Sole Proprietor, it’s a good idea to establish some key components of the business.
Some things that are helpful to think 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 will you sell, how it’s made, how it’s delivered, how it’s marketed or advertised, etc.
It’s a good idea to think of marketing ideas early on to help your business succeed. A good marketing plan can include developing a logo and branded business name, deciding where to advertise, building a website, and developing a social media strategy.
You should also choose a primary business address. This can be an actual office address, but it doesn’t have to be. It could be your home address or you could even rent a mailbox address. The purpose is to have one designated address where all mail for the business is sent, and that you can use on official documents.
Step 2 – Name your Sole Proprietorship and get a DBA
Now that you’ve done some business planning, you have the option to name your company.
By default, a Sole Proprietorship’s business name is the owner’s legal name. However, if you’d rather do business under a different name, you can file a DBA name (Doing Business As name).
For example: Felipe Cruz is starting a wedding planning business. Instead of having to do business under his full name – Felipe Cruz – he’d like to use the business name “Excellence in Events”. In this case, he’ll need to register his DBA name “Excellence in Events”.
Having a DBA name can make it a lot easier to brand and market your business. It can also make your business sound larger than a one-person business.
Having said that, a DBA isn’t required for a Sole Proprietorship in Massachusetts. If you’d rather do business under your first and last name, that is 100% okay.
In Massachusetts, you reserve a DBA at the city or town level. There is also a state-level DBA, which the Secretary of the Commonwealth considers a type of Trademark. Read more about Massachusetts Trademarks.
How do I get a DBA for a Massachusetts Sole Proprietorship?
To register your DBA in Massachusetts, you’ll need to file the DBA Certificate with the city or town clerk in any city or town where your business operates. Fees will vary.
Here is a list of City and Town websites in Massachusetts to help you identify the right clerk to contact.
To register your DBA as a Trademark at the state level in Massachusetts, you’ll need to submit a Trademark Application and pay a $50 fee.
Need to save time? We recommend hiring MyCompanyWorks ($99 + state fee) to file your DBA.
Step 3: Get an EIN from the IRS
By default, a Sole Proprietor uses their Social Security Number (SSN) for tax obligations and financial reporting.
However, a Sole Proprietor also has the option of getting an EIN Number (Employer Identification Number) from the IRS.
Notes: Whether or not you get an EIN for your Sole Proprietorship will not impact your taxes. Your taxes will be filed the same either way.
An EIN is also called a Federal Tax ID Number, Federal Employer Identification Number, Employer Identification Number, or FEIN. They all mean the same thing.
Getting an EIN for your Sole Proprietorship may be a good idea for a few reasons:
Safety (prevent identity theft)
Without an EIN, you may need to use your SSN when dealing with vendors and clients. For example, if a client pays you more than $600 per year, you’ll need to provide them with IRS Form W9.
Instead of using your SSN, you can list your EIN instead on Form W-9.
The same thing can also apply to online account setups and other places you may do business with.
By 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’s required. If you want to hire employees for your business, you will need to get an EIN first. This is because an EIN is required in order to report wages and pay payroll taxes for your employees.
Note: As a Sole Proprietor, while you are considered self-employed, you are technically not an employee.
Step 4 – Research business license requirements
When researching required business licenses, it’s a good idea to check for state-level requirements.
Good news! Massachusetts doesn’t require a “general” business license at the state-level for Sole Proprietors. So there’s nothing to do for this step.
However, depending on your industry, and where you’re doing business, you may need an industry-specific license or a license issued by your municipality (like the county or city where you’re doing business).
Please see our Massachusetts Business Licenses and Permits page or these resources:
- Massachusetts Permit Regulatory Office
- Massachusetts Professional Licenses & Permits
- Contact your specific City or Town in Massachusetts
Tip: Save time by hiring an expert. We recommend using IncFile ($99) to handle the business license research for you.
Step 5 – Maintain your business
Once you have established your Sole Proprietorship, there are a more few things to do to make your business run smoothly:
- Get a business bank account
- Maintaining business financial records
- File taxes
Get a Business Bank Account
Keeping business finances separate from personal finances is an important part of operating a business safely. That’s why it’s important to open a business bank account for your Sole Proprietorship.
Business bank accounts also typically allow you to process more transactions per month than a personal bank account, amongst other business benefits, like business credit cards or business loans.
Some banks may require you to have a DBA in order to open a business bank account for a Sole Proprietor. We recommend calling the bank ahead of time to see if a DBA is required, or if you can open the business account in your own name.
While you’re on the phone, we also recommend asking about the products they offer, and what documents they require.
For example, most banks require you to bring your photo ID, as well as your EIN Confirmation Letter and DBA filing if you have an EIN or DBA).
Keep Business Records
Most states require that businesses keep certain records. There is no law specifically governing Sole Proprietorships, but it’s a good idea to keep the following records:
- Copies of tax returns for the previous 3 years
- Copies of any financial statements for the previous 3 years
If you’re just starting out, you won’t have these records right away, and that’s okay. Just save and organize them as you do business.
We recommend establishing a specific location to store the records.
For example, a filing cabinet in your house or at the business’s office location will work fine. So will an online cloud storage system where you scan and save all of your business documents.
File your taxes (or hire an accountant)
As mentioned above, when operating as a Sole Proprietor, you’ll report taxes on your business profits or losses using your personal tax return (Form 1040).
While you can file your personal tax return yourself (using a software like Turbotax), you may want to hire a professional to maximize your business tax credits and deductions.
If you’d like to hire a business accountant, we’ve made a list of Business Accountant Recommendations for all 50 states.
Conclusion
While a Sole Proprietorship may seem easier and less expensive than starting a formal business entity (like an LLC), it can be risky.
Sole Proprietorships don’t offer asset protection, and you’ll likely still have to file paperwork for a DBA name and obtain licenses or permits.
In general, we don’t see many good reasons to operate a business as a Sole Proprietorship, and we don’t recommend it. They don’t have any advantages over legal entities.
Instead, we recommend starting an LLC in Massachusetts.
Note: The exception to this would be if you really don’t have money to pay for an LLC, especially if your state has expensive filing fees. For some, a Sole Proprietorship may be the only option for getting your business off the ground and earning profits. In this scenario, a Sole Proprietorship can be a good place to start.
Massachusetts Sole Proprietorship FAQs
What is better, LLC or Sole Proprietorship in Massachusetts?
While starting a Sole Proprietorship is easy, the advantages end there.
Sole Proprietorships don’t offer personal asset protection. If your business is sued, you’re personally liable for the business debts and obligations. On the other hand, if you form 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 legal business entity like an LLC.
We recommend forming an LLC instead of a Sole Proprietorship in Massachusetts. Not only do LLCs offer personal asset protection, but they are more credible – and there’s no difference between how you file taxes for a Sole Proprietorship and an LLC.
How do I make myself a Massachusetts Sole Proprietorship?
There is no form to file to start a Sole Proprietorship in Massachusetts. 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 under a business name besides your first and last name, you’ll need to register a DBA (Doing Business As) Name.
Are Sole Proprietorships required to register in Massachusetts?
No, Sole Proprietorships aren’t required to register with the Massachusetts Secretary of the Commonwealth. Your Sole Proprietorship simply exists once you decide to start a business and engage in business activities.
However, if your Sole Proprietorship will use a DBA, you must register that with the city or town where your business operates. You can also file your DBA as a Trademark with the Massachusetts Secretary of the Commonwealth.
Additionally, you should check with an accountant in Massachusetts about whether your Sole Proprietorship needs to register with the Massachusetts Department of Revenue for things like sales tax or other types of taxes.
Can a DBA be a Sole Proprietorship in Massachusetts?
A DBA isn’t a Sole Proprietorship. A DBA is just a “nickname” for something else – whether that’s a business or person(s).
And the default business name for a Sole Proprietorship is the first and last name of the owner (like: Bob Barkley).
Having said that, Sole Proprietors can do business using a DBA (doing business as) name.
For example, if you’re running a bagel shop, you can file a DBA called “Bob’s Bagels & Sandwiches” in order to better brand and market your business.
How are Sole Proprietorships taxed in Massachusetts?
Sole Proprietors pay taxes on business income or losses using their personal income tax return.
Any profit or loss from your business is reported on a Schedule C with the Internal Revenue Service (IRS). And the Schedule C is included with the rest of your personal tax return (Form 1040).
Sole Proprietors are also required to file and pay taxes (like the self-employment tax).
What’s the difference between a Sole Proprietorship and a Partnership?
A Sole Proprietorship is an informal business structure with one owner. Said another way, it’s a one-person business.
A Partnership (aka General Partnership), is an informal business structure with two or more owners.
While both structures have pass-through taxation, a Partnership is required to also file Form 1065 at tax time.
A Sole Proprietorship isn’t required to file Form 1065. Instead, a Sole Proprietor needs to include a Schedule C on their personal Form 1040 tax return.
References
IRS: Income & Expenses
IRS: Sole Proprietorships
Massachusetts Sole Proprietorships
Massachusetts New Business Guide
Massachusetts Division of Corporations: Trademarks
Massachusetts Division of Corporations: Trademark Forms
Massachusetts Secretary of the Commonwealth: Welcome to Massachusetts
Matt holds a Bachelor's Degree in business from Drexel University with a concentration in business law. He performs extensive research and analysis to convert state laws into simple instructions anyone can follow to form their LLC - all for free! Read more about Matt Horwitz and LLC University.
