What Is A Sole Proprietorship?

Sole proprietorships are one of the most common business structures for small businesses with just one owner. They’re easy, efficient, and cost-friendly. However, you’ll have less liability protection than other business types.

Before deciding on becoming a sole proprietor, it’s important to understand what is a sole proprietorship, how a sole proprietorship works, and the pros and cons of going with the business structure.

What Is A Sole Proprietorship?

A sole proprietorship is a business structure in which a single person owns the business, and there’s no legal distinction between the owner’s personal and business-related property.

In the words of the IRS, a sole proprietor is:

“Someone who owns an unincorporated business by himself or herself.”

How Does A Sole Proprietorship Work?

A sole proprietorship is a business with one owner who operates the business. A sole proprietorship is not a separate legal entity.

This means the owner is solely responsible for the business’s debts, obligations, and liabilities. Your personal assets may be seized to fulfill debts, and lawsuits can be brought against you personally. This lack of liability protection is an important consideration to weigh before deciding on a sole proprietorship.

Because of this, sole proprietorships, while very easy to set up, and more ideal for smaller, low-risk businesses. Sole proprietorships are very common for freelancers, consultants, side hustles, e-commerce, and other small businesses.

Do You Need To Register A Sole Proprietorship Business?

You won’t be required to register your sole proprietorship in any of the 50 states. You can use your Social Security information when filing your taxes since the IRS does not distinguish between your business and personal financials.

However, there are some caveats. Always check with your city and county to see if they require you to register your business with them. The majority of sole proprietorships will need a business license to be in compliance. Also, if what you sell is subject to a sales tax, you’ll need to acquire a seller’s permit through your state.

It’s important to note here that a sole proprietorship is not a separate legal entity. This means the owner is solely responsible for the business’s debts, obligations, and liabilities. Your personal assets may be seized to fulfill debts, and lawsuits can be brought against you personally.

Do You Need Business Insurance For A Sole Proprietorship?

The answer to this is a clear, resounding yes. Sole proprietors are especially susceptible to legal and financial woes since there is no distinction between their personal and business assets — if things go south, you could lose your car, your personal savings, or even your home.

At the bare minimum, the kinds of business insurance coverages you should consider are:

• General Liability Insurance: This is the foundation for all other kinds of insurance. If you run advertisements, or if there’s a chance a customer could get hurt at your place of business, general liability insurance will cover the legal and medical costs associated with the accident or mishap.
• Professional Liability Insurance: Businesses that earn income by providing specialized services ought to look into a professional liability plan. Say you’re a sole proprietor who charges for financial advice — if a client sustains financial harm from following your advice, professional liability insurance can help protect you.
• Commercial Auto Insurance: If you use your car for business-related purposes, you may be responsible for purchasing a commercial auto policy in some states (such as Florida).

Can You Get A Business Bank Account With A Sole Proprietorship?

It’s possible to get a business bank account with a sole proprietorship. The SBA recommends that you have your Social Security Number and business formation documents ready, but check to see if the bank you want to open an account through requires an EIN or any other kind of business information.

You may be tempted to handle your business financials with your personal bank account, but in the long run, it’s a better idea to keep the two separate:

• A business bank account will help you keep your personal and business-related finances separate, which is immensely helpful for record-keeping and if you happen to get audited.
• It will be far easier to apply for small business loans over time since having a business bank account allows you to build your business credit (such as through a business credit card).

Check out our guide on the best small business bank accounts. When you’re ready, we’ve also covered everything you need to set up a business bank account.

Examples Of Sole Proprietorship Businesses

Realistically, there’s no limit to the kinds of businesses that can be sole proprietorships. So long as a good or service is being sold and there’s only one business owner, it’s set up to go. To get a sense of the breadth of possibilities, consider these examples:

• Home healthcare providers
• Food and beverage caterers
• Housekeeping services
• Virtual assistants
• Freelance writers, editors, or designers
• Tutors
• Carpenters
• Computer repair technicians
• Landscapers
• Bookkeepers
• Plumbers
• Spiritual guides
• Arts and crafts designers
• Dog walking services
• Babysitters
• Financial advisors
• Web and marketing consultants
• Lifestyle coaches

All of these can be structured as sole proprietorships.

The Advantages Of Sole Proprietorships

The Disadvantages Of Sole Proprietorships

While being a sole proprietor definitely comes with benefits, there are also drawbacks to consider when weighing your decision. Those drawbacks include the following:

Sole Proprietorships VS Other Business Structures

How do sole proprietorships stack up to each other type of business structure? Here’s a detailed comparison.

Sole Proprietorship VS Partnership

The biggest difference between a sole proprietorship and a partnership is the number of owners of the business. A sole proprietorship has a single owner. A partnership has two or more owners. Each partner must accurately and compliantly file their taxes according to the income they’ve accrued through the business.

Besides that, a sole proprietorship and a partnership are very similar:

• Neither has to be registered with the state
• Profits and losses are filed on personal tax returns for both

Sole Proprietorship VS LLC

A limited liability company, or LLC, combines the benefits of different business entities. In contrast to sole proprietorships, LLCs have liability protections in place to protect the owners’ personal assets. LLCs may also have multiple owners, whereas a sole proprietorship is limited to a single owner.

Other important differences are that:

• An LLC must register with the state
• Starting an LLC incurs fees, whereas sole proprietorships do not
• Owners of an LLC can choose how they are taxed — they may opt to have their profits taxed as personal income, as with a sole proprietorship, or as corporate earnings

Sole Proprietorship VS Corporation

Sole proprietorships and corporations are quite different. A corporation is the most expensive business entity to form and must be registered with the state. There are also multiple ongoing requirements corporations must meet that sole proprietors don’t, such as holding meetings and having a board of directors.

Altogether, these are the biggest differences to look out for:

• Corporations may have multiple owners, whereas a sole proprietorship has just one owner
• Corporations can also raise capital through the sale of stock, which a sole proprietor can’t do
• Corporations offer the best personal liability protection for their owners
• Corporations must pay separate income taxes — if dividends are paid to shareholders, shareholders must report this on their personal tax returns, resulting in double taxation for the corporation

A Sole Proprietorship Is Best For…

A sole proprietorship is best for businesses that don’t need complicated requirements, protections, and expenses to start up and maintain. The simpler your business, and the more it benefits from a single owner with full control, the better it is to remain a sole proprietor.

In general, the kinds of businesses that are best suited for sole proprietorships are:

• Low-Risk Businesses: A sole proprietorship will benefit you in the long run if the chances of you getting sued for, say, malpractice or physical harm are slim to none.
• Low-Income Businesses: Lower income isn’t necessarily a bad thing — maybe your business is a creative way to earn extra money. If you sell handmade scarves and socks on Etsy or Shopify, for instance, you’ll likely be taking home more cash if you opt to remain as a sole proprietor.
• Home-Based Businesses: Say you’ve converted your garage into a workout studio or hair salon. A sole proprietorship might be the best way to structure your business in this case.

How To Start A Sole Proprietorship

A sole proprietorship is the quickest, easiest, and most inexpensive way to start and operate a new business. Unlike the above-mentioned business entities, which require registration and periodic fees, simply engaging in business activities legally establishes a sole proprietorship.

Depending on the kind of business you choose to run, though, additional steps may be involved before you can open up shop. Here are the most basic ways you can get things started:

1. Decide What You’re Going To Sell: This part is crucial! Knowing in advance what you plan to sell will help you prepare for any risks, liabilities, and extra expenses.
2. Apply For A DBA: Your business’s name is automatically your legal name if you’re a sole proprietor. A DBA, which stands for “doing business as,” is a great way to create a stronger business identity without registering it as a separate legal entity.
3. Get An Employer Identification Number (EIN): Having an EIN for your sole proprietorship comes with several benefits. Not only will you be able to hire employees legally, but it will also help prevent identity theft and establish business credit. You can easily apply through the IRS for free.
4. Acquire Any Necessary Licenses, Certifications, & Permits: This really comes down to the requirements for your industry set by your city, county, and state. Check your local government portals to make sure your business is compliant — don’t risk any fines.

For many aspiring business owners, operating a sole proprietorship is the right path to entrepreneurship. If you’re set on remaining a sole proprietor, consider applying for a DBA, open a business bank account, and definitely don’t skimp on business insurance — you’ll thank yourself when you need to use it!

Bear in mind that once you start a sole proprietorship, you aren’t stuck with having that as your business structure. If an LLC, partnership, or corporation best suits your projected growth and business operations, you can transition to one of those when the time comes.

To help your sole proprietorship succeed, check out some of our other resources like our insurance guide for sole proprietors, our freelance tax guide, and our top choices for:

• Freelance bank accounts
• Freelance loans

FAQs About Sole Proprietors