Sole Proprietorship

A sole proprietorship is a simple business structure where one person owns and runs the business. It’s an easy and low-cost way to start a new business.

What is a sole proprietorship?

A sole proprietorship is an unincorporated business entity owned and operated by one individual, with pass-through income tax and no legal separation between the person and the business. Becoming a sole proprietor is a popular choice for small business owners, independent contractors, and consultants because it has plenty of benefits. 

  • Easy to start and maintain: There’s no formation paperwork required to begin conducting business in most states, and you don’t have to file annual reports.
  • Pass-through taxation: A sole proprietorship is a pass-through business structure, which means you report income on your personal tax return. Business income is also only taxed once.
  • Full control of business: You make all the decisions and keep all the profits since you’re the sole proprietor.

There are also a few drawbacks to consider before becoming a sole proprietor:

  • No liability protection: There’s no legal separation between you and the business entity, which means you take full personal liability. That could put your personal assets at risk if someone files a lawsuit.
  • No protection from debt or tax liability: Since the business and owner are the same entity, you’re also personally liable to pay taxes and all debts.
  • Fundraising challenges: Without stocks or shares to sell, you can’t attract investors. Plus, banks may be cautious about lending to business owners who are personally liable.

You don’t have to file any paperwork to form a sole proprietorship, but you might still need to meet other local or state requirements:

To find out exactly what small business owners need in your area, contact your county clerk or your state’s Secretary of State office.

FAQs

What qualifies you as a sole proprietor?

If you run a business by yourself and haven’t registered as a limited liability company (LLC) or corporation, you're a sole proprietor by default. This includes everything from freelance gigs to full-time home-based businesses.

What are some examples of sole proprietorships?

Common examples of sole proprietors include freelance writers, consultants, lawn care providers, house cleaners, and small shop owners. Any one-person operation with no formal business structure can be a sole proprietorship.

What’s the difference between a sole proprietorship vs. a limited liability company?

A sole proprietorship is an unincorporated business entity that doesn’t separate personal assets and business assets. LLCs require formal registration, offer legal protection, and may have more options to pay taxes.

Do sole proprietors need an EIN?

Not always—sole proprietorship business owners with no employees can use their Social Security number to pay income tax. But those who hire workers or want to open a business bank account will need an employer identification number (EIN).

How LegalZoom can assist

LegalZoom offers various services that can help sole proprietors manage the legal aspects of their business. From filing a DBA to help establish a professional identity to providing consultations on the best ways to protect personal and business assets, LegalZoom is equipped to support sole proprietors in building and maintaining a successful business.

Whether you're just starting out or looking to streamline your existing operations, understanding your responsibilities and risks as a sole proprietor is crucial. With the right tools and guidance, you can ensure that your business complies with relevant laws and thrives in a competitive market.

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