How to Start a Sole Proprietorship in Massachusetts

(November 2024)

In This Article

Introduction

So, you’re thinking about starting a sole proprietorship in Massachusetts? That’s a great step! Starting a business is exciting but can be overwhelming with all the paperwork and rules, especially when you’re doing it for the first time. But don’t worry! First, you choose a business name. If you plan to operate under a name different from your own, you need to register that name with the Massachusetts Secretary of the Commonwealth as a “Doing Business As” (DBA).

Next, check if the name you choose is available and doesn’t conflict with any existing businesses. Once you have that sorted, obtain specific licenses or permits, depending on your business type. This could include local business permits or health department permits, especially if you’re in food service.

You also want to consider whether you need to get an Employer Identification Number (EIN) from the IRS, but for many sole proprietors, using your Social Security number is sufficient.

Lastly, set up a separate business bank account to keep your finances organized. This separation helps you track income and expenses, making tax season much easier. With these steps, you’re well on your way to launching your sole proprietorship in Massachusetts.

1. Choose Your Business Name

The very first thing you need to do is decide on a name for your business. You can operate the business under your own name—like “Sammy Doe”—and that would be fine. However, if you want to give your business a unique name (for example, “Sammy’s Plumbing Services” or “Doe’s Bakery”), you need to register that name.

In Massachusetts, if you decide to operate under any name other than your own legal name, you must file what’s called a “Doing Business As” (DBA) name. It’s also sometimes referred to as a business certificate. This is important for opening a business bank account or marketing yourself with a business name that isn’t just your personal name.

To file a DBA:

  • Go to the city or town clerk’s office where your business is located. Each city or town handles DBA filings, so you have to do this at the local level, not state-wide.
  • Fill out the DBA form they give you. It’s pretty simple—just basic information like your name, the business name you want to use, and your address.
  • Pay the filing fee. It usually costs between $30 and $50, depending on where you file.

Once you file your DBA, ensure you renew it every four years because it’s valid for four years.

2. Get Your Employer Identification Number (EIN)

Now, if you’re going to hire employees or you don’t want to use your Social Security number on everything related to your business, you might want to apply for an Employer Identification Number (EIN). Even though, as a sole proprietor, you aren’t required to have an EIN if you don’t have employees. But, it’s a good idea because it helps protect your personal Social Security number from being used on forms like tax filings, bank accounts, or contracts. You can get an EIN for free by going to the IRS website.

If you’re hiring employees or need an EIN for other reasons, this step is important. If you’re just going to be a one-person business with no employees, you can skip it, but make sure you get one to keep your personal information more secure.

3. Get a Business License or Permit

Depending on what type of business you’re starting, you might need a license or permit from the state or your local town/city. Massachusetts doesn’t have a general business license that all businesses must get, but certain types of businesses do require specific licenses.

For example:

  • If you’re opening a restaurant, you need a food and beverage permit.
  • If you’re working in construction, you might need a contractor’s license.
  • If you’re offering professional services like hairdressing, legal services, or real estate, there are state-specific licenses you need.

To find out if your business needs a license, the best place to start is the Massachusetts Office of Consumer Affairs and Business Regulation or your city/town clerk’s office. This is where you  can get the rundown of what applies to your specific business.

4. Register for Taxes with the Massachusetts Department of Revenue

Even though a sole proprietorship is the simplest business structure, you need to register for and pay taxes just like any other business.

If you sell goods or services that are subject to Massachusetts sales tax (6.25%), you need to register with the Massachusetts Department of Revenue (DOR). This process is done online through a system called MassTaxConnect.

Here’s what to do:

  • Go to the MassTaxConnect website. 
  • Register your business for a tax account number.

 Depending on your business, you might have to register for a Sales and Use Tax Permit, which allows you to collect sales tax from customers and remit it to the state. This is required if you sell tangible products or certain services.

Keep in mind, Massachusetts has a small business exemption for certain industries, so you may not need to register if your annual revenue is below a certain threshold, but it’s important to check with the DOR or an accountant to make sure.

5. Understand Your Tax Obligations

As a sole proprietor, your business income is reported on your personal tax return. File your taxes using a Schedule C (Profit or Loss from Business) form, which is part of your personal tax return (Form 1040). Schedule C is where you report your business income and expenses.

Here are a few important things to keep in mind about taxes:

  • Self-Employment Tax: Since you’re self-employed, you’re responsible for paying both the employer and employee portions of Social Security and Medicare taxes. This is called the self-employment tax, and it’s currently 15.3%. You report this on your federal tax return using Schedule SE.
  • Estimated Taxes: As a sole proprietor, you need to pay your taxes quarterly throughout the year. These are called estimated taxes, and it helps you avoid penalties for underpayment. The IRS expects you to pay taxes as you earn income, not just when you file your tax return at the end of the year.
  • State Income Tax: In addition to federal taxes, you also need to pay state income tax on your business income. Massachusetts has a flat income tax rate of 5%.

So, work with an accountant, at least in the beginning, to make sure you’re keeping up with your tax obligations. They can help you track your income and deductions and estimate how much you should be setting aside for taxes.

6. Get Business Insurance

One thing that’s easy to overlook but really important is getting the right insurance for your business. Even as a sole proprietor, you’re taking on certain risks, and since there’s no legal separation between you and the business, your personal assets could be at risk if something goes wrong.

Depending on your business, you might need:

  • General Liability Insurance: This covers accidents or damages that could happen at your place of business or as a result of your work. For example, if you run a plumbing business and accidentally flood someone’s house, this insurance would help cover the costs.
  • Professional Liability Insurance: If you’re providing services, like consulting, accounting, or design, this protects you if someone sues you over mistakes or unsatisfactory work.
  • Home-based Business Insurance: If you’re running your business from home, don’t assume your homeowner’s policy covers your business-related activities. Check with your insurance provider to see if you need a rider for business-related equipment or liability.

It’s better to be safe than sorry when it comes to protecting your assets, so getting the right insurance is key.

7. Keep Track of Your Business Expenses and Income

Since you’re going to be paying taxes on your business income, make sure you keep good records. You don’t have to invest in expensive accounting software right away, but you should have some way to track your income and expenses.

Here are some tips:

  • Keep receipts: Whether you’re buying supplies, paying for marketing, or making business-related purchases, keep all your receipts. These expenses may be deductible at tax time.
  • Track mileage: If you use your car for business purposes, keep track of your mileage. You can either deduct the actual expenses (like gas, maintenance) or use the standard IRS mileage rate.
  • Set aside money from each payment: A good rule of thumb is to set aside 25-30% of your income for taxes. Since you’re paying both federal and state taxes, and possibly self-employment tax, having this amount saved up can help you avoid any unpleasant surprises at tax time.

You can keep track of your finances using a simple spreadsheet (like Excel or Google Sheets) or free accounting software like Wave. If your business starts growing, you might want to upgrade to more robust software like QuickBooks, but in the beginning, simple methods can work just fine.

8. Understand Massachusetts Employment Requirements (If You Hire Staff)

If you plan to hire employees down the line, even just one or two people, there are a few additional steps you need to follow. 

  • Register with the Massachusetts Department of Revenue for withholding tax. This is because you need to withhold state income tax from your employees’ paychecks.
  • Get workers’ compensation insurance. In Massachusetts, businesses with employees are required to have this insurance, which helps cover any work-related injuries or illnesses that employees may suffer.
  • Pay into unemployment insurance. You need to pay unemployment taxes, which help fund benefits for employees if they lose their jobs.
  • Report new hires to the Massachusetts New Hire Reporting Center. This is required to help enforce child support orders.

Hiring employees comes with added responsibilities, so be sure you’re prepared for the extra paperwork and costs that come with payroll and employment laws. For now, though, if you’re just a sole proprietor without employees, you don’t need to worry about these steps.

9. Market Your Business

Once your sole proprietorship is officially set up, it’s time to spread the word! Marketing is key to getting customers and growing your business.

Here are a few ways to get started:

  • Create a website: Even a basic website with your services, contact information, and a way for people to reach you can go a long way. There are affordable platforms like Wix, Squarespace, or WordPress where you can set up a website yourself without much tech knowledge.
  • Get on social media: Depending on your type of business, you might want to set up social media accounts to promote your services. Facebook, Instagram, and LinkedIn are great platforms to engage with potential customers.
  • Join local business groups: Consider joining local networking groups or your Chamber of Commerce. These can help you meet other business owners and potential clients in your community.

Marketing doesn’t have to be expensive when you’re just starting out. The key is to be consistent and get your name out there as much as possible.

Recap

To start a sole proprietorship in Massachusetts, choose a business name. If it’s different from your own, register it as a “Doing Business As” (DBA) with the Secretary of the Commonwealth. Next, check if your name is available. Depending on your business type, you may need specific licenses or permits, so make sure to look into that. You generally don’t need an EIN unless you plan to hire employees, as you can use your Social Security number. 

Ensure you renew your DBA. Your DBA (if you’re using one) is valid for four years. Make sure to renew it before it expires so you can continue operating under your chosen business name. Also, remember to file your federal and state tax returns on time each year. Keep track of your income and expenses throughout the year to make tax filing easier. You also need to file quarterly estimated taxes if required.

Finally, consider opening a separate business bank account to keep your finances organized.

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