By Jake Lawson, LLC Formation Strategist
Starting a sole proprietorship in Arkansas is dead simple—so simple that you might already be one without realizing it. But after helping over 1,200 entrepreneurs structure their businesses, I’ve learned that “easy to start” and “smart business decision” are very different things.
Let me walk you through everything you need to know about Arkansas sole proprietorships, including why most businesses I work with end up choosing something else.
What Is a Sole Proprietorship in Arkansas?
A sole proprietorship is the simplest business structure possible—so simple there’s literally no paperwork to file with the state. If you’re doing business by yourself in Arkansas with the goal of making money, congratulations: you’re already operating as a sole proprietorship.
The basic reality: You are the business, and the business is you. There’s no legal separation between your personal identity and your business operations.
Examples of instant sole proprietorships:
- Freelance graphic designer taking on your first client
- Dog walker charging neighbors for pet care
- Handyman advertising services on Craigslist
- Wedding planner booking your first event
The moment you start taking action to generate income from these activities, you’re operating as a sole proprietorship—whether you intended to or not.
The Real Advantages of Arkansas Sole Proprietorships
Let me be honest about what actually works with this structure.
Ultimate Simplicity
No state filing fees, no ongoing compliance requirements, no registered agent needs, no annual reports. You decide to start a business today, you’re in business today.
Straightforward Taxes
Your business income and expenses flow directly onto your personal tax return via Schedule C. No separate business tax return needed.
Complete Control
Every business decision is yours alone—no partners to consult, no board meetings, no corporate formalities.
Low Startup Costs
Beyond any licenses or permits your specific business might need, there are no mandatory formation costs.
The Real Disadvantages (That Nobody Warns You About)
Here’s where most entrepreneurs get blindsided by sole proprietorship reality.
Zero Personal Asset Protection
This is the big one. If your business gets sued, your personal assets—your house, car, savings account, kid’s college fund—are all fair game to settle business debts.
Real-world example: A client’s dog walker business faced a lawsuit when a dog bit someone during a walk. As a sole proprietor, her personal assets were at risk. An LLC would have provided a legal barrier.
Credibility Issues
Try opening a business bank account, securing a commercial lease, or landing a major client as “John Smith dba Smith’s Services.” Now try the same thing as “Smith Services LLC.” The difference in how you’re perceived is night and day.
Limited Growth Options
Want to bring in partners later? Add investors? Sell the business? These become incredibly complicated when you’re structured as a sole proprietorship.
Self-Employment Tax Burden
You’ll pay self-employment tax on all business profits—15.3% on top of regular income tax. LLCs have strategies to reduce this burden.
Difficulty Separating Business and Personal
Without formal business structure, it’s easy to mix personal and business expenses, creating headaches at tax time and potential IRS problems.
Arkansas Sole Proprietorship vs. LLC: The Real Comparison
Let me break down the actual differences that matter for Arkansas businesses:
| Factor | Sole Proprietorship | Arkansas LLC |
| Formation Cost | $0 | $45 (state fee) |
| Annual Requirements | None | Annual Report (~$150) |
| Asset Protection | None | Complete separation |
| Tax Complexity | Simple (Schedule C) | Same complexity |
| Business Credibility | Limited | Professional |
| Growth Flexibility | Restricted | Unlimited |
| Bank Account Setup | Often difficult | Straightforward |
The bottom line: An Arkansas LLC costs $45 to start and provides the same tax treatment as a sole proprietorship, but with complete asset protection and professional credibility.
How to Start a Sole Proprietorship in Arkansas (If You’re Sure)
If you’ve weighed the pros and cons and still want to go the sole proprietorship route, here’s how to do it properly.
Step 1: Business Planning and Setup
Even though sole proprietorships are informal, you still need to think through the basics:
Business model: How will you make money? What will you sell or provide?
Target market: Who are your customers and how will you reach them?
Startup costs: What do you need to get started?
Business address: Where will you receive business mail and conduct operations?
Step 2: Choose Your Business Name (Optional DBA)
By default, your sole proprietorship operates under your legal name (John Smith). But if you want to do business under a more branded name (Smith’s Consulting Services), you’ll need to file for a DBA (Doing Business As) name.
In Arkansas, DBAs are called “Fictitious Names” and are filed with your county clerk, not the Secretary of State.
DBA filing process:
- Contact the county clerk where your business operates
- File the fictitious name application
- Pay the filing fee (varies by county, typically $10-50)
- Publish notice in local newspaper (some counties require this)
When you need a DBA:
- Opening a business bank account under a business name
- Creating a professional brand identity
- Marketing under something other than your personal name
Step 3: Get Your EIN (Recommended)
While sole proprietors can use their Social Security Number for business purposes, I strongly recommend getting an EIN (Employer Identification Number) from the IRS.
Why get an EIN:
- Protect your SSN from identity theft
- Required if you plan to hire employees
- Makes business banking and tax filing cleaner
- Free from the IRS (never pay for this service)
How to get an EIN:
- Visit the IRS website (irs.gov)
- Complete the online EIN application
- Receive your EIN immediately upon approval
- Keep the confirmation letter for your records
Step 4: Research License and Permit Requirements
Arkansas doesn’t require a general business license for sole proprietors, but your specific industry might have requirements.
Check for licenses at these levels:
- State level: Professional licenses, industry-specific permits
- County level: Local business permits, zoning compliance
- City level: Municipal business licenses, health department permits
Common licensed businesses in Arkansas:
- Contractors and tradespeople
- Food service businesses
- Healthcare providers
- Real estate professionals
- Childcare services
Where to research: Check the Arkansas Department of Labor and Licensing website, and contact your local city and county offices.
Step 5: Open a Business Bank Account
This is crucial for sole proprietors. Keeping business and personal finances separate protects you legally and makes taxes infinitely easier.
What you’ll need:
- Photo ID
- EIN confirmation letter (if you got one)
- DBA filing (if you have one)
- Initial deposit
Pro tip: Call the bank first to ask about their requirements and account options. Some banks have better small business programs than others.
Step 6: Set Up Business Records and Bookkeeping
Even though sole proprietorships are informal, you still need proper record-keeping.
Essential records to maintain:
- Income and expense receipts
- Bank statements
- Tax returns for the past three years
- Contracts and invoices
- Equipment and asset records
Recommended tools:
- QuickBooks Self-Employed
- FreshBooks
- Simple spreadsheet system
- Separate filing system for paper documents
Tax Obligations for Arkansas Sole Proprietors
Your tax situation as a sole proprietor is relatively straightforward but has some important nuances.
Federal Tax Requirements
Schedule C: Report business income and expenses on your personal tax return
Schedule SE: Pay self-employment tax (15.3% on net earnings)
Form 1040: Include business profits/losses with your personal income
Arkansas State Tax Considerations
Income tax: Business profits are subject to Arkansas personal income tax
Sales tax: May be required if you sell taxable goods or services
Employment taxes: Required if you hire employees
Quarterly Estimated Taxes
If you expect to owe $1,000 or more in taxes, you’ll need to make quarterly estimated payments to avoid penalties.
When to Convert from Sole Proprietorship to LLC
Most businesses I work with eventually outgrow the sole proprietorship structure. Here are the common triggers:
Revenue milestones: Once you’re making $50,000+ annually, asset protection becomes critical
Client growth: Landing bigger clients who expect to work with formal business entities
Liability concerns: Any business with potential lawsuit exposure
Growth plans: Want to add partners, employees, or seek investment
Professional image: Need credibility for contracts, banking, and partnerships
The conversion process: There’s no simple “upgrade” from sole proprietorship to LLC. You have to:
- Form a new LLC
- Transfer business assets and contracts
- Update banking and vendor relationships
- Notify the IRS of the business structure change
- Update all marketing materials and legal documents
It’s a significant hassle—which is why I usually recommend starting with an LLC if you’re serious about your business.
Arkansas Business License and Permit Resources
State-Level Resources:
- Arkansas Secretary of State business guides
- Arkansas Department of Labor and Licensing
- Arkansas Department of Finance and Administration
Local Resources:
- County clerk offices for DBA filings
- City business licensing departments
- Local Small Business Development Centers
My Honest Recommendation for Most Arkansas Entrepreneurs
After working with hundreds of Arkansas businesses, here’s my straight advice: skip the sole proprietorship and form an LLC instead.
Why LLCs make more sense:
- Only $45 more expensive to start
- Same tax treatment as sole proprietorship
- Complete personal asset protection
- Professional credibility from day one
- Easy to add partners or investors later
- Simpler business banking and contracting
When sole proprietorships actually make sense:
- You’re truly testing a business idea short-term
- Your business has essentially zero liability risk
- You’re absolutely bootstrapping and can’t afford $45
- You plan to incorporate as a C-Corp within six months
Common Arkansas Sole Proprietorship Questions
Q: Do I need to register my sole proprietorship with Arkansas?
A: No state registration required. You only need to file if you want a DBA/fictitious name.
Q: Can I have employees as a sole proprietor?
A: Yes, but you’ll need an EIN and must handle payroll taxes properly.
Q: What happens if I move to another state?
A: Your EIN travels with you, but you may need new local licenses and permits.
Q: Can I convert to an LLC later?
A: Yes, but it’s not a simple process. You essentially start a new business and transfer everything over.
The Bottom Line on Arkansas Sole Proprietorships
Sole proprietorships are easy to start but come with significant limitations and risks. For most serious businesses, the minimal additional cost of forming an Arkansas LLC provides far better protection and flexibility.
My recommendation: If you’re testing a business idea or absolutely can’t afford the $45 LLC fee, a sole proprietorship can work temporarily. But if you’re committed to building a real business, start with an LLC structure.
The asset protection alone is worth the small additional investment, and you’ll save yourself headaches down the road when your business grows.
Ready to start your Arkansas business the right way? Compare your options carefully and choose the structure that matches your long-term goals, not just your immediate budget. Whether you choose sole proprietorship or LLC, make sure you understand the legal and tax implications for your specific situation.
Questions about choosing the right business structure for your Arkansas venture? I’ve helped hundreds of entrepreneurs make this exact decision based on their industry, growth plans, and risk tolerance. The right choice depends on your specific circumstances—not just the easiest option.