New business statistics from the United States Census Bureau show that in August 2021 alone, more than 427,842 new business applications were filed in the US. Where entrepreneurs choose to start their business will determine its future success. Entrepreneurs will need a favorable economic environment with taxes being a large deciding factor. A smart business form for entrepreneurs, specifically solo entrepreneurs, will be forming a sole proprietorship. This article will explore which state is best for the formation of sole proprietorships.
What is a Sole Proprietorship?
A sole proprietorship, which is also known as a sole trader or a proprietorship, is an unincorporated business with only one owner. The owner would have to pay personal income tax on profits earned from their business. Many entrepreneurs prefer this business form because of the lack of government regulation seeing that no separate legal entity is created. Because of this, sole owners of businesses, individual self-contractors, and consultants are the most common business people to make use of this business form. It has also been found that many sole proprietors do business using their own names seeing that it would be unnecessary to create a separate business or trade name. But entrepreneurs should keep in mind that the business owner of a sole proprietorship is not exempt from liabilities incurred by the sole proprietorship.
Which state is the best state for getting a sole proprietorship?
The state in which the business owner is based is where the sole proprietorship should be formed. Business owners should always consider forming a sole proprietorship in the state they are based in because this is simply the most cost-effective and convenient route to follow. Business owners will be familiar with state laws, the government offices are easily accessible and they would likely know who to contact for information.
But there are states which have attractive conditions for sole proprietorships due to the tax conditions. If entrepreneurs are able to relocate or want to make use of better tax benefits out of their state, they should consider moving to one of the best states to start a sole proprietorship or small business in. The five best states for this would be Wyoming, Alaska, South Dakota, Florida and Montana.
Wyoming is one of three states which do not impose a corporate or an individual income tax on businesses. Instead, Wyoming gets its money from sales taxes, but this is low. Wyoming’s sales tax is only 4%. The state also does not impose taxes on prescription drugs or groceries, making it tax-friendly for businesses and residents.
Alaska is a favourable state for small businesses because it has no individual income or state-level tax. But entrepreneurs need to keep in mind that Alaska has a corporate tax rate of up to 9.4% for its top earners. Entrepreneurs also need to keep in mind that despite the favourable tax conditions, Alaska has a high cost of living, a poor labor market and the cost of starting a business is high.
- South Dakota
Like Wyoming, South Dakota has no corporate or individual income tax, and its startup costs are low. Entrepreneurs need to note that South Dakota does impose a sales tax of 4.5%. South Dakota also allows some cities within the state to set their own rates up to 2.0% above state rates.
Florida is a favourable state for small businesses because it does not charge an individual income tax, which is perfect for sole proprietors. But the state does charge a 5.5% corporate tax and its sales tax rate ranges between 6.0% and 8.0%.
Montana’s is a favourable state for small businesses because their corporate tax rate is 6.75%, with a minimum tax of $50 regardless of the business’ earnings. A large benefit of forming a business in Montana is that the state does not charge a sales tax. Seeing that Montana has a low cost of starting a business, a strong labor market and that they allow business owners to access capital easily, they would be a good fit for sole proprietorships.
Forming a sole proprietorship in the right state may prove to be beneficial for businesses, but this depends on the state and the goals of the business. Business owners need to always keep in mind that the state they are based in will always be the best state to form a sole proprietorship in. For entrepreneurs looking for more information about sole proprietorships, and their differences from other business forms, The Really Useful Information Company (TRUiC) compares differences here.