What is: A Sole Proprietorship?

You may have heard the term, Sole Proprietorship be used when talking about businesses and taxes. But what exactly is a sole proprietorship? If you are an aspiring entrepreneur or if you are looking for a brief review on what a sole proprietorship is, then look no further! Here we will cover the need-to-know information. 

The Definition of a Sole Proprietorship 

Simply put, a sole proprietorship is a business that is owned and operated by one person. This puts the owner liable for any debts that the business may owe. 

What Taxes Apply to a Sole Proprietorship? 

Although a sole proprietorship may not be its own separate entity, there are still certain tax obligations that need to be met. 

Personal Tax Return 

Since a sole proprietorship is not a separate entity then you will have to report your income and expenses from your business within your individual tax return. 

Form 1040 Schedule C 

In order to report your business’s income, profit, and loss then you will need to attached Schedule C to your Form 1040. As mentioned above, a sole proprietorship does not require any corporate tax forms separate from your own tax returns since the business is operated under your name. 

Self-Employment Tax 

Operating as a sole proprietorship means that you are considered self-employed, which means that you will need to pay self-employment tax. This is in addition to Federal and State income taxes. As of 4/27/2025, the self-employment tax rate is 15.3%.

Business Expenses 

With self-employment comes the ability to deduct business expenses that can reduce your taxable income. Some common deductions include: 

- Spending money on normal operations

- Self-employed health insurance 

- SEP IRA or Solo 401k (Retirement account) 

Is a Sole Proprietorship the Best Fit for You? 

Choosing to go with a sole proprietorship can offer you some benefits, and at the same time, it can also have some downsides. Here, we will go through some of the main points for you to consider regarding whether or not a sole proprietorship is the best fit for you. 

Pros 

First, let’s go over some of the benefits that a sole proprietorships have: 

• Complete Control: With sole proprietorships, you have full control over your business's operations. From pricing to marketing, you are your boss! 
  
  
• Minimal Paperwork: Unlike other business structures, you won’t need to file with your state. On top of this, you won’t have to worry about corporate documents or annual reports that other business structures have to keep track of.
  
  
• Pass-through taxation: As mentioned above in our tax section, sole proprietorships don’t require any sort of corporate tax forms. 

Cons 

Now, let’s go over some of the negatives that come with operating as a sole proprietorship:

• No Liability Protection: Since the business is not registered as its own entity, all of the liabilities that come from the business fall to you. Remember, you personally own this business, so any liabilities fall under your responsibility. 
  
  
• Creditors May Seize Assets: If your business gets sued or if you are unable to pay off a loan payment, then creditors may go after your personal assets to recover the money they are owed. 
  
  
• No Continuity: As the owner of the business, if you retire, pass away, or stop operations completely, then your business ends. Sole proprietorships cannot continue under new ownership since the business is directly tied to you. 

Starting off your business as a sole proprietorship is a good option for those who are looking to start off small or if they see themselves only working solo. However, always keep in mind that you are personally liable for any debts or legal issues that may arise in your business. 

How Can I Open My Business as a Sole Proprietorship? 

Are you looking to get started and officially open your business as a sole proprietorship? Then you are in luck, here are the steps to officially start operating as a sole proprietorship: 

1. Choose a business idea and name 

Think about the business you want to open, what you’ll offer, and who your main target audience will be. 

Then, once you've come up with your great idea, choose a name for your business! As a sole proprietorship, you can choose to operate under your own legal name, or you can choose to register a DBA. This allows you to use any name for your business while still operating as a sole proprietorship.

2. Obtain any required licenses or permits 

Depending on the industry you choose, you may need a license or permit in order to actually start daily operations. Make sure to check with your city or county government for any specific requirements that need to be met. Register to do business in your state (all business entities must do this). On top of state business licensing, there may be additional licenses or permits for localities or regulated operations.

3. Apply for an EIN (Employer Identification Number) - Optional

While applying for an EIN is optional, it is strongly recommended to have one. 

• You can protect yourself from using your Social Security number on specific tax forms, such as 1099s. 
• Required to have an EIN If you ever plan on hiring employees in the future

4. Open a Business Bank Account 

Having a separate bank account for your business can help keep your finances organized. On top of this, it can make it easier to track income and expenses from your business. 

5. Set up an Accounting System 

Operating as a sole proprietorship means that the liabilities directly fall into your hands, so you need to make sure that your finances are in check and that every transaction made matches up. Having an accounting system is crucial to a healthy business, whether it be income, expenses, receipts, etc. 

Some common tools include spreadsheets or software like QuickBooks. However, if accounting is not your thing, look no further than our team at LedgerFi! Our team will handle the books while you continue in your daily operations. 

Bottom Line 

A sole proprietorship gives the owner full control over the business. On top of this, starting as a sole proprietorship requires little cost with minimal paperwork. However, it is always important to keep in mind that there is no liability protection. The owner is responsible for any debts owed to a creditor.