Sole Proprietorship

A sole proprietorship is the simplest business structure: an unincorporated business owned and operated by a single individual. There is no legal separation between owner and business, so the owner receives all profits and is personally responsible for all debts and obligations.

Key takeaways

• Single-owner business with no separate legal entity.
• Simple and inexpensive to start and operate.
• Business income is reported on the owner’s personal tax return (pass-through taxation).
• Owner has unlimited personal liability for business debts and legal claims.
• Common starting form for freelancers, contractors, and small local businesses.

Who chooses a sole proprietorship?

Sole proprietorships are common for small, low-risk businesses and entrepreneurs testing a concept. Typical examples:
* Freelance writers, photographers, and designers
* Independent contractors and consultants
* Personal trainers and tutors
* Small landscaping, cleaning, or repair businesses

How to establish a sole proprietorship

Starting is usually straightforward, though exact requirements vary by jurisdiction:
* Choose a business name. If operating under a different name than your legal name, file a “Doing Business As” (DBA) or assumed name where required.
* Obtain local business licenses, permits, or occupancy certificates as required by city or state.
* Apply for an Employer Identification Number (EIN) if you hire employees, have certain tax filing needs, or prefer not to use your Social Security number. Many sole proprietors can use their SSN for tax purposes.
* Register for state sales tax permits if you sell taxable goods or services.
* Keep separate bookkeeping for business income and expenses for tax and management purposes.

Taxes and reporting

• Business income and expenses are reported on Schedule C (Form 1040). Net profit or loss flows to the owner’s individual return.
• Self-employment tax (Social Security and Medicare) is calculated on Schedule SE.
• Sole proprietors typically pay estimated quarterly taxes (Form 1040-ES) to cover income and self-employment tax.
• Qualified business income from pass-through businesses may be eligible for the Section 199A deduction (up to 20%) subject to limits and expiration rules in current law.

Pros

• Easy and inexpensive to establish and operate.
• Minimal paperwork and administrative formalities.
• Single layer of taxation — business profits are taxed once at the owner’s individual tax rate.
• Full control: the owner makes all decisions.

Cons

• Unlimited personal liability — personal assets (home, savings) can be at risk for business debts or lawsuits.
• Harder to raise capital — investors typically prefer formed entities, and lenders may view new sole proprietorships as higher risk.
• Growth and succession planning are more limited compared with corporations or LLCs.

Sole proprietorship vs. LLC vs. partnership

Liability: Sole proprietorships provide no liability protection. LLCs and corporations create separate legal entities that generally shield owners’ personal assets. Partnerships share liability among partners unless structured as a limited partnership or LLP with protections for some partners.
Formation: Sole proprietorships usually require no formal state filing (beyond DBAs or licenses). LLCs require filing Articles of Organization and often an operating agreement. Partnerships may require partnership agreements and, depending on type, state filings.
Taxes: All three can allow pass-through taxation, but corporations (C-corps) tax profits at the corporate level. LLCs and partnerships offer more flexibility in tax treatment and allocation of profits.
When to convert: Consider forming an LLC if your business faces liability risks, is growing, expects significant revenue, or needs outside investment.

Transitioning to an LLC

Common steps when converting a sole proprietorship to an LLC:
* Verify the desired business name is available.
* File Articles of Organization with your state.
* Create an operating agreement to outline ownership and management.
* Obtain a new EIN for the LLC (if required).
* Transfer business assets and update contracts, licenses, and bank accounts.

Practical considerations

• Insurance (general liability, professional liability) can reduce some risk but does not replace the legal protection of an LLC or corporation.
• Maintain clear financial records and separate personal and business finances where possible.
• Consult a tax advisor or attorney when in doubt about tax implications, liability exposure, or choosing a business structure.

Bottom line

A sole proprietorship is a low-cost, low-complexity way to start a business and is well suited to small, low-risk ventures. Its major drawback is unlimited personal liability. As a business grows, owners often reassess and may form an LLC or corporation to gain liability protection and greater flexibility for financing and growth.

Fast fact

There were roughly 33.3 million small businesses in the United States in 2023, collectively employing tens of millions of people.