Sole proprietorship

Why choose a sole proprietorship?

Operating as a sole proprietorship is the simplest way to conduct business. It doesn't require registering with the state (except possibly for a business name), making it an attractive option for many small businesses and self-employed individuals. Here are a few benefits.

• Ease of setup and low cost: Starting a sole proprietorship usually requires little paperwork or expense, apart from potential fees for filing a fictitious or "doing business as" (DBA) business name.
• Complete control: As a sole proprietor, you have full authority over all business decisions.
• Simplified tax filing: Business income is taxed on your personal tax returns, which can make filing taxes less complicated.

While a sole proprietorship may make sense when starting your new business, many small business owners soon outgrow this business structure. Many sole proprietors find the need to switch to an LLC or corporation business structure if they need to hire employees or want greater legal protections.

Sole proprietorship risks and considerations

While starting a sole proprietorship offers significant flexibility and ease, it also comes with considerable risks.

• Personal liability: If your business fails or incurs debts, your personal assets (like your home and car) could be at risk.
• Difficulty in raising capital: Sole proprietors may find it challenging to raise money since they can't sell stock and may have limited loan options.

FAQs on sole proprietorship

What is the difference between a sole proprietorship and an LLC?

Liability protection is the main difference between a sole proprietorship and a limited liability company (LLC). An LLC provides limited liability protection to its owners, meaning personal assets are generally protected from business debts and legal actions. In contrast, a sole proprietor personally assumes all financial and legal liabilities of the business, which can put personal assets at risk.

Do sole proprietors pay taxes on personal income?

Yes, sole proprietors pay taxes on business income through their personal income tax returns. They are also responsible for self-employment taxes covering Social Security and Medicare taxes.

What are some examples of a sole proprietor?

A freelance graphic designer who works under their own name and does not set up any formal business structure is a typical example of a sole proprietor—gig economy workers, such as taxi drivers, ride-share drivers, tutors, and stylists.

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.