Establishing a sole proprietorship is one of the most common and straightforward ways to start a business. It’s the default structure for an individual starting out, with Small Business Association data showing that 86% of all US businesses without employees on payroll operate as sole proprietorships.
Although becoming a small business owner is often thrilling, it also poses real challenges—even for entrepreneurs who use this basic type of business structure.
Learn about sole proprietorships and the various types available, and get a nine-step guide on how to start a sole proprietorship of your own.
What is a sole proprietorship?
A sole proprietorship is a business owned and operated by a single individual, with no legal distinction between the owner and the business. This structure offers simplicity and complete control, but the owner is personally liable for business debts. Unlike a limited liability company (LLC), a sole proprietorship does not provide personal liability protection, which can expose personal assets to business risks.
When a freelancer strikes out on their own—whether they’re a graphic designer, a business consultant, a writer, etc.—the default designation for income tax is as a sole proprietorship. A sole proprietor also can make and sell products, although usually when a business scales up it chooses to operate as a corporation or other type of business structure. This establishes a separation between the finances and legal obligations of the company and its owner or owners.
Common setups for sole proprietorships
Solo business owners have several options for how to operate a sole proprietorship. Choosing the right type depends largely on the nature of your business.
Unincorporated sole proprietorship
This is the simplest sole proprietorship, where the business operates under the owner’s name. It requires minimal paperwork and is the easiest to set up. The owner is personally liable for all business debts and obligations.
Fictitious business name sole proprietorship
When an owner wants to operate their sole proprietorship under a business name different from their own, they must register a fictitious name. It is sometimes known as a “doing business as,” or DBA, name. This type of sole proprietorship provides a bit of anonymity and allows for branding, but like an unincorporated sole proprietorship, the owner remains personally liable for all business obligations.
Professional sole proprietorship
Accountants, consultants, doctors, lawyers, and other professionals sometimes practice under a professional sole proprietorship. This structure requires compliance with specific licensing and regulatory guidelines related to the profession while retaining the simplicity of a sole proprietorship.
💡 Note: It’s generally not advised to operate a professional practice as a sole proprietorship due to unlimited personal liability. This structure exposes personal assets, such as your home and savings, to business-related lawsuits unrelated to professional services, like a client slipping and falling on your premises.
If you’re offering professional services, consider forming a legal entity like a corporation (S or C corps) or a limited liability partnership (LLP) instead.
Sole proprietorship requirements
Starting a sole proprietorship doesn’t involve many federal hurdles, but you’ll want to understand a variety of state and local obligations.
Federal requirements
At the federal level, there is no formal registration process to establish a sole proprietorship. The US government considers you a sole proprietor by default if you are the single owner of a business and do not register as another legal entity, like an LLC.
The main requirements revolve around taxes:
- Income tax: All profits and losses from the business are reported on your personal income tax return using Schedule C (Form 1040).
- Self-employment tax: As a sole proprietor, you are responsible for paying self-employment taxes, which cover Social Security and Medicare contributions. It’s calculated on Schedule SE (Form 1040).
- Employer Identification Number (EIN): An EIN from the Internal Revenue Service (IRS) is not required, unless you:
- Hire employees
- File for bankruptcy
- Buy an existing business
- Are required to file certain federal excise tax forms
If you do not have an EIN, you will use your Social Security number for all business-related tax filings.
Note that most sole proprietors also do not require a federal license or permit to operate. However, if you’re in a federally regulated industry, like broadcasting, firearms, or alcohol sales, you must obtain the proper licenses.
State-specific requirements
The rules can change slightly depending on where you live. Your state, county, and even city may have their own requirements for registration, naming, and licensing. Check your jurisdiction’s website about the sole proprietorship requirements specific to your area.
Business name and registration
Consult your state’s main business filing office (your Secretary of State) for specific guidelines. The most common requirement is registering your business name if you aren’t using your legal name. You would file a DBA in this case, as mentioned above.
But it’s not the same in every state. For example:
- Texas: You’ll file an Assumed Name Certificate with the county clerk in every county where you conduct business.
- Florida: You’ll register a Fictitious Name online with the Florida Department of State. The registration is valid for five years.
- California: You register a Fictitious Business Name (FBN) Statement with the county clerk and then publish it in a local newspaper.
Fees, renewal timelines, and naming rules vary by state.
How to start a sole proprietorship in 9 steps
- Start with a business idea
- Assess business structure needs and tax considerations
- Register your domain name
- Obtain necessary business licenses and permits
- Open a business bank account
- Obtain a federal employer identification number (EIN)
- Purchase business insurance
- Conduct health and safety training
- Manage your finances
Starting a sole proprietorship requires having a plan, putting it into motion, and complying with relevant laws and tax obligations. Follow these nine steps to establish your own sole proprietorship.
1. Start with a business idea
Refine your business idea, then turn it into a business plan that shows demand and sets the direction of your vision.
Clarify the core premise of your business in these key areas:
- Problem: The customer pain point you’ll solve.
- Target audience: Who is most impacted by that pain point and would benefit from your solution?
- Value proposition: Your business’s promise to customers.
Expand on your business plan to include:
- Market snapshot: Define your market segment, its size, and your key competitors.
- Offerings: Clearly detail your products or services, including different packages and any guarantees you’ll provide.
- Go-to-market (GTM) strategy: How will you reach your customers? Choose two to three marketing channels to test first.
- Operations: List the tools, suppliers, business hours, and order fulfillment processes you will need to operate.
- Financials: Project your startup costs, fixed monthly expenses, target profit margin, and your break-even point.
2. Assess business structure needs and tax considerations
A sole proprietorship is often best for single-owner, low-risk businesses because it’s simple and inexpensive to set up. If that sounds like the right fit for you, then you’re on the right track.
Consider sole proprietorship taxes. When you’re the boss, you pay your own taxes. Here’s the breakdown of the federal rate:
- Total self-employment tax: 15.3% of your net earnings.
- Social Security: The first 12.4% applies to your income up to the annual limit ($168,600 for 2024).
- Medicare: The remaining 2.9% applies to all of your net earnings with no limit.
Taxes aren’t withheld automatically, so you’ll pay them in quarterly estimated payments throughout the year using Form 1040-ES.
Choose a DBA, if needed
If you plan to operate under a name other than your own, like Starlight Copywriting instead of Jane Smith, you’ll need to register it. Register your DBA in your state of incorporation, usually with your local county clerk’s office.
💡Tip: Before your register, do a quick search to make sure the name you want isn’t already trademarked or in use by another business in your area. Use a tool like Northwest Registered Agent’s Business Name Search to perform a search in your state.
3. Register your domain name
Every business needs a digital home, and your domain name is the address. It’s how customers will find you, and a good domain makes you look legit.
Some tips for choosing a domain name:
- Avoid complicated words and make it easy to spell.
- Closely match your business name or DBA.
- Follow the mantra, “the shorter, the better.”
- Use the top-level domain (TLD) .com if possible, because it’s the most recognized and trusted.
Once you have the perfect domain name, you need to register it through a domain registrar. These companies reserve your online address for an annual fee.
There are many registrars out there, but platforms like Shopify make this step easy. When you use Shopify’s domain services, you can buy a domain name and build your ecommerce store all in one place. It simplifies your setup so you don’t have to connect services from different companies.
4. Obtain necessary business licenses and permits
To operate legally, your business may need the right licenses and permits. Common types include:
- General business license: Some cities require a basic permit to operate legally.
- Sales tax permit: Lets you collect sales tax on products and services you sell.
- Home occupation permit: Sometimes required if you run a business from home to comply with zoning regulations.
- Professional license: Are you a stylist, contractor, or other certified pro? You may need a state-issued license to prove your professional credentials.
Check with your state and local government offices—such as the Secretary of State or office of incorporation—to identify any business licenses or permits you may need.
5. Open a business bank account
Opening a business bank account is the next step. It creates a clear separation between your personal and business finances, which lets you track expenses and make tax preparation much easier. It also helps you present a more professional image to clients.
When you’re looking for a bank, don’t just open an account with the first one you see. Look for some of these features:
- Low or no fees: As a new business owner, you don’t want to pay someone just to hold your money. You’ll need the cash to invest in your business. Find an account with no or very low monthly fees.
- Good accounting: Make sure your bank has built-in accounting features, or easily integrates with popular options like QuickBooks.
- A great mobile app: As a boss on the go, you want a reliable app with features like mobile deposit and money transfers.
Once you find a bank, you’ll just need your Social Security number (or EIN) and DBA registration (if you have a fictitious name) to open it.
📚 Read: The Best High-Yield Business Savings Accounts
6. Obtain a federal employer identification number (EIN)
Although not always required for sole proprietors (who are often identified by their Social Security numbers for tax purposes), getting an EIN can have benefits.
It may be necessary if you plan to open accounts with certain banks, accept credit card payments, or hire employees. An EIN can also act as an extra layer of security against identity theft.
7. Purchase business insurance
Even if your business has low startup costs, business insurance is always good to consider.
Remember, as a sole proprietor, there is no legal difference between you and the business. A lawsuit or accident could put your personal assets at risk.
Common types of business insurance are:
- General liability: This is like your essentials pack. It covers if someone gets hurt or you damage property. A $1 million dollar policy is a normal starting point for small businesses.
- Professional liability insurance: Standard insurance option for consultants and freelancers. It protects you if clients claim you made a costly mistake. Coverage often starts between $250,000 and $1 million.
- Commercial Umbrella Insurance: For extra protection, you can add another $1 million or more in coverage on top of your other policies.
💡Tip: Ask providers’ if they offer Business Owner’s Policy (BOP) insurance. It bundles general liability and commercial property insurance together at a lower price than buying them separately.
8. Conduct health and safety training
In some cases, you may need to train employees (if you have them), and undergo health and safety training yourself. You also may need to research and adhere to certain industry-specific standards for health and safety.
9. Manage your finances
Keep detailed records of business expenses, income, and receipts. Consider consulting a tax professional to maximize your tax deductions; taxes on self-employed individuals can be high in some states.
Advantages of a sole proprietorship
Running a sole proprietorship comes with several advantages, largely because of the structure’s relative simplicity and ease of setup. This makes it an attractive option for small entrepreneurs running lean operations.
Here are a few of the advantages of a sole proprietorship:
Complete control of business decisions
As the sole owner, you have total control over all of the sole proprietorship’s business decisions and activities. Without other business partners, who may have ideas that differ from your own, you can implement your personal vision.
Simple tax returns
Sole proprietors report business income on their personal tax return. This simplicity can save time and reduce accounting costs compared with incorporated businesses, such as C corporations (C corps) or LLCs.
Retain 100% of net income
Unlike other business entities, where partners or shareholders can claim a share of the earnings, sole proprietors receive all the profits the business generates.
Disadvantages of a sole proprietorship
The simplicity of a sole proprietorship also has some drawbacks. Weigh these against the benefits before establishing your business structure.
Here are a few of the disadvantages of a sole proprietorship:
Personal liability
The owner is personally liable for all business debts and legal obligations. A single lawsuit or unpaid debt can reach personal savings, a home, or other property.
New businesses face enough risk as it is. Historically, only about 49% of employer establishments survive five years and 33.8% survive 10. One incident can also add to personal liability exposure. For example, a typical slip-and-fall claim averages around between $10,000 and $50,000 before legal fees.
Limited financial resources
Sole proprietors can’t sell stock and banks may be hesitant to lend, which limits growth capital.
A 2024 report from various Federal Reserve Banks found that only 51% of small business applicants were fully approved for loans or lines of credit. Without access to traditional funding, sole proprietors have to fill the gap with their own money or by borrowing from friends and family.
Limited expertise and skill pool
A sole proprietorship is limited to the skills and knowledge of the owner, which may prove inadequate to various business challenges, from accounting to marketing. In more complex business structures, multiple partners or managers can bring different perspectives, experiences, and skills to the table.
How to start a sole proprietorship FAQ
How do I establish myself as a sole proprietor?
If you begin work as a sole proprietor subject to Internal Revenue Service (IRS) tax forms like a Form W-9, you will be designated an unincorporated sole proprietor by default. To establish yourself as any other kind of sole proprietor, you must choose a business name, register it if you use a DBA, obtain necessary business licenses and permits, set up a dedicated business banking account, and pay taxes (including the self-employment tax).
How much does it cost to start a sole proprietorship?
The cost of setting up a sole proprietorship varies. It includes expenses such as business registration fees (if applicable), obtaining necessary licenses and permits, potential fees for legal advice, and the cost of opening a business bank account. These fees can range from about $50 to $500, depending on your business location and specific compliance requirements.
What qualifies you as a sole proprietor?
To qualify as a sole proprietor, you must be the single owner and operator of a business, personally managing its day-to-day affairs and assuming all responsibility for its financial and legal obligations. There’s no formal registration for an unincorporated sole proprietorship, making it a straightforward choice for individual entrepreneurs who want to run their own business.
Can I convert my LLC to a sole proprietorship?
Yes, you can switch from an LLC to a sole proprietorship, but it’s a formal process. You need to legally dissolve your LLC with the state, which includes settling debts and filing dissolution paperwork. Once the LLC is officially closed, you can continue operating as a sole proprietor.
What is the minimum income for a sole proprietor?
There is no minimum income requirement for a sole proprietor. You do need to pay self-employment taxes if you earn a net profit of $400 or more per year.
Do I need to register a sole proprietorship in CA?
You don’t have to register with the state of California to form your sole proprietorship. If you use a business name different from your own, you must register that fictitious business name with your county.
How easy is it to start a sole proprietorship?
A sole proprietorship is the easiest business structure to start, hands down. There’s no legal paperwork to file and you automatically become one as soon as you start a business on your own. The main work is getting any licenses or filing a DBA.
