Sole Proprietorship: How to Start & Run One

Starting a business doesn’t always mean filing paperwork with your state or forming an LLC. If you’re testing a business idea or prefer the simplest possible structure, a sole proprietorship might be your answer.

A sole proprietorship is the default business structure when you work for yourself. No formation paperwork required. But “simple” doesn’t mean you can ignore taxes, licenses, or liability risks.

By the end of this guide, you’ll understand exactly what a sole proprietorship is, how to start one legally, and when it makes sense to choose this structure over an LLC or corporation.

What You Need to Understand

what is a sole proprietorship?

A sole proprietorship is an unincorporated business owned by one person. When you freelance, consult, or sell products under your own name without forming an LLC or corporation, you’re automatically operating as a sole proprietorship.

There’s no legal separation between you and your business. You are the business. This means you’re personally responsible for all business debts and legal issues — what lawyers call “unlimited personal liability.”

How it connects to business formation

Here’s where it gets interesting: you can choose to stay as a sole proprietorship, or you can form a separate legal entity like an LLC.

Many entrepreneurs start as sole proprietors to test their business idea, then form an LLC or corporation once they’re making steady money or want liability protection.

Legal requirements (simplified)

The federal government doesn’t require you to register a sole proprietorship. You simply start operating and report your business income on your personal tax return using Schedule C.

However, you still need to:

Get required business licenses and permits
Register a “Doing Business As” (DBA) name if you’re not using your legal name
Collect and pay sales tax if you sell taxable goods or services
Pay self-employment taxes on your business income

How to Start a Sole Proprietorship — Step by Step

Step 1: Choose your business name

You can operate under your legal name (like “Sarah Johnson Consulting”) or choose a different business name.

If you want to use a business name that’s different from your legal name, you’ll need to file a DBA (also called a fictitious name or assumed name) with your state or county. This typically costs $10-$50.

Timeline: DBA filing usually takes 1-2 weeks to process.

Step 2: Check licensing requirements

Every business needs to comply with federal, state, and local licensing requirements. This varies dramatically by business type and location.

Common requirements include:

General business license from your city or county
Professional licenses (for contractors, real estate agents, etc.)
Health department permits (for food businesses)
Sales tax permit (if selling products)

How to check: Start with your city’s website, then check your state’s small business portal. The SBA.gov license lookup tool can help identify federal requirements.

Step 3: Open a business bank account

Even though you and your business are legally the same entity, keep your business and personal finances separate. This makes taxes much easier and looks more professional.

Most banks require:

Government-issued ID
DBA certificate (if using a business name)
Business license (if required in your area)

Some banks also require an EIN (Employer Identification Number), even for sole proprietorships without employees.

Step 4: Get an EIN (optional but recommended)

An EIN is a federal tax ID number for your business. Sole proprietorships can use the owner’s Social Security Number for taxes, but getting an EIN is smart because:

Some banks require it for business accounts
You’ll need it if you hire employees
It keeps your SSN private on business documents
It’s free and takes 10 minutes online at IRS.gov

Step 5: Set up your accounting system

You need to track business income and expenses for taxes. Options include:

Simple spreadsheet (fine for very small businesses)
Accounting software like QuickBooks or FreshBooks
Hiring a bookkeeper

Track everything business-related: income, expenses, mileage, home office costs.

Step 6: Get business insurance

Since you’re personally liable for business debts and lawsuits, insurance becomes critical. Consider:

General liability insurance (protects against customer injuries, property damage)
Professional liability insurance (protects against errors in your work)
Property insurance (protects business equipment)

Cost: Basic general liability insurance often costs $300-$1,000 per year for low-risk businesses.

How Your Entity Type Affects This

Sole Proprietorship vs LLC

Sole Proprietorship:

No formation paperwork or fees
Personal liability for all business debts
Business income taxed as personal income
Hard to bring in partners or investors
Business ends when you die or become incapacitated

LLC:

Requires state filing and annual fees
Limited personal liability (your personal assets are generally protected)
More tax options (can elect S-Corp taxation)
Easy to add members or transfer ownership
Can continue after owner’s death

Common mistake: Thinking an LLC is always better. If you’re testing a low-risk business idea and want to minimize startup costs, sole proprietorship can make sense initially.

Sole Proprietorship vs S-Corp

S-Corps require more paperwork and compliance than sole proprietorships, but they can save money on self-employment taxes if you’re making substantial profit.

When to consider S-Corp: If your business profit exceeds about $60,000 annually, the self-employment tax savings might justify the extra complexity.

Sole Proprietorship vs C-Corp

C-Corps are designed for businesses seeking investors or planning to go public. They’re overkill for most solo entrepreneurs due to double taxation and complex compliance requirements.

Tools, Costs & Tips

Free tools

IRS.gov for EIN application
SBA.gov for licensing guidance
Your state’s Secretary of State website for DBA requirements
SCORE.org for free business mentoring

Paid tools that help

Accounting software: $10-$50/month
Business insurance: $25-$100/month depending on coverage
Professional tax software or CPA: $200-$2,000/year

What to budget

Startup costs:

DBA filing: $10-$50
Business licenses: $50-$500 (varies widely)
Initial insurance: $300-$1,000/year
Basic accounting software: $120-$600/year

Ongoing costs:

Insurance renewals
License renewals
Quarterly estimated tax payments
Annual tax preparation

When to DIY vs hire someone

DIY-friendly tasks:

Getting an EIN
Opening a business bank account
Basic bookkeeping
DBA filing

Consider hiring help for:

Complex licensing requirements
Tax planning and preparation
Insurance selection
Legal contracts

Tip: Start simple and add professional help as your business grows. A $500/hour attorney isn’t necessary for a $2,000/month freelance business, but makes sense once you’re making six figures.

FAQ

Do I need an EIN for a sole proprietorship?

Not legally required, but recommended. You can use your Social Security Number for taxes, but an EIN keeps your SSN private and some banks require it for business accounts.

Can I hire employees as a sole proprietorship?

Yes, but you’ll need an EIN and must handle payroll taxes, workers’ comp insurance, and employment law compliance. Many sole proprietors work with independent contractors instead.

How do taxes work for sole proprietorships?

You report business income and expenses on Schedule C with your personal tax return. You’ll pay income tax plus self-employment tax (15.3%) on your business profit. Make quarterly estimated tax payments if you expect to owe more than $1,000.

Can I convert my sole proprietorship to an LLC later?

Absolutely. Many entrepreneurs start as sole proprietors and form an LLC once their business is established. You’ll transfer your business assets to the new LLC and start filing taxes as an LLC.

What’s the biggest risk of sole proprietorship?

Personal liability. If your business gets sued or goes into debt, your personal assets (house, car, savings) are at risk. This is why many business owners prefer LLCs even for small businesses.

Do I need a DBA if I use my real name?

Only if you add descriptive words that aren’t your legal name. “John Smith” doesn’t need a DBA, but “John Smith Plumbing” does. Rules vary by state, so check your local requirements.

Conclusion

Sole proprietorship offers the simplest path to business ownership — no formation paperwork, minimal startup costs, and complete control over your business. It’s perfect for testing business ideas or running low-risk ventures.

But simple doesn’t mean risk-free. You’re personally liable for all business obligations, and you’ll face higher self-employment taxes compared to some other business structures.

If you decide sole proprietorship isn’t right for you, we can help you explore other options. At BusinessFormations.com, we walk entrepreneurs through entity selection, handle state filings, get your EIN, and provide ongoing compliance support — all in one place. We work in all 50 states and make the formation process straightforward.

Ready to explore your options? [Get started here](https://www.businessformations.com/get-started/) and we’ll help you choose the right business structure for your specific situation.