What is a sole proprietorship?

A sole proprietorship is the simplest and most common structure people choose to start a business. It is an unincorporated business owned and run by one individual, with no distinction between the business and you, the owner. You are entitled to all the profits and you are responsible for all of the business’s debts, losses and liabilities.

Setting up a sole proprietorship

You do not have to take any formal action to set up a sole proprietorship. As long as you are the only owner, this status arises automatically from your business activities. In fact, you may already own one without knowing it. If you are a freelance writer, for example, you are a sole proprietor.

But like any business, a sole proprietorship needs the required licenses and permits. Regulations vary by industry, state and location. Check with your city, county and state which permits and licenses apply to your business. And if you are going to work with another company as a client or supplier, it pays to confirm that it exists and is active in the United States.

If you decide to operate under a name other than your own, you will probably have to file a fictitious name (also known as an assumed name, trade name or DBA name, short for “doing business as”). The name must be original, not one another business has already claimed.

Sole proprietorship taxes

Because you and your business are one and the same, the business itself is not taxed separately: the sole proprietorship’s income is your income. You report income, losses and expenses on Schedule C and the standard Form 1040. The bottom-line amount from Schedule C carries over to your personal tax return. It is your responsibility to withhold and pay all income taxes, including estimated taxes and self-employment taxes. You can find more information on sole proprietorship taxes and other forms at IRS.gov.

Advantages of a sole proprietorship

Easy and inexpensive to set up. A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, and legal costs are limited to obtaining the required licenses or permits.

Complete control. Because you are the sole owner of the business, you have complete control over every decision. You are not required to consult anyone else when you need to make decisions or want to make changes.

Easy tax preparation. Your business is not taxed separately, so meeting the tax reporting requirements for a sole proprietorship is easy. Tax rates are also the lowest of all business structures.
Disadvantages of a sole proprietorship

Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the business’s debts and obligations. This risk extends to any liabilities incurred as a result of an employee’s actions.

Hard to raise money. Sole proprietors often struggle to raise funds. Because you cannot sell shares in the business, investors often will not invest. Banks are also reluctant to lend to sole proprietors because they doubt the loan will be repaid if the business fails.

Heavy burden. The flip side of complete control is the burden and pressure it can bring. You alone are ultimately responsible for the successes and failures of your business.