Many people who decided to try running their own company for the first time wont waste time and money on complicated setups. A sole proprietorship is, by design, the simplest and least expensive way to begin; almost anyone in the United States can start one by opening a bank account and keeping track of sales.
In this comprehensive guide, we’ll explain what a sole proprietorship is, how it works, the advantages and disadvantages of choosing this model, and step-by-step instructions on how to set one up.
Whether you’re launching a freelance career, selling products online, or starting a local service business, understanding the ins and outs of a sole proprietorship can help you make an informed decision.
What is a Sole Proprietorship?
A sole proprietorship is a type of unincorporated business that is owned and operated by a single individual. It is not a separate legal entity like a corporation or a limited liability company (LLC). Instead, the business and the owner are legally considered the same person.
This means the owner receives all profits but is also personally responsible for all debts and liabilities incurred by the business.
Sole proprietorships are the most common form of business structure in the U.S., especially among freelancers, consultants, gig workers, online sellers, and service-based entrepreneurs. It offers a straightforward path to entrepreneurship with minimal red tape.
Since there’s no legal separation between the owner and the business, all business income, losses, and taxes flow directly to the owner’s personal tax return. This is known as pass-through taxation, and it simplifies tax filing compared to more complex business entities.
Key Features of a Sole Proprietorship
1. Single Ownership
Controls entirely with one person, who decides, hires, spends, and occasionally panics solo. No silent investors or boardroom ballots slow things down-or speed them up, depending on your outlook.
2. No Legal Separation
Courts and statute books treat the business and its founder as twins without separate birth certificates. That unity turns convenient during tax season but exposes personal assets to creditors, vendors, or the occasional lawsuit that spills over the counter.
3. Pass-Through Taxation
Net earnings from a sole proprietorship appear on the owner’s Form 1040, Schedule C, so no separate business return shows up in the IRS queue. This one-line pass-through system can feel tidy, yet the profits absorb whatever rate the taxpayer already pays on wages or interest income.
4. Ease of Setup
Launching a sole proprietorship takes minutes rather than weeks. Most jurisdictions ask nothing more than a local business license unless a distinctive trade name is used, in which case a quick DBA filing covers the naming requirement.
5. Low Start-Up Costs
There are no state incorporation fees, no annual franchise taxes, and certainly no board minutes to generate. A city permit or a modest bond may still be required, yet even those charges usually total far less than the smallest legal retainer.
Pros and Cons of a Sole Proprietorship
Every form of business organization carries its own steel and soft spots. A sole proprietor wakes up, hangs out a shingle, and is instantly the chief, counsel, and janitor of that entity, which is liberating and confining at once.
✅ Pros
✔️ Simplicity and Ease of Formation
Simplicity reigns. No formation paperwork means same-day approvals for anyone willing to open a bank account and start invoicing.
✔️ Full Control
Absolute ownership confers unilateral decision-making authority, meaning no boards, no partners, and no dilatory approval chains. An entrepreneur can pivot overnight without a sacrificial meeting agenda.
✔️ Tax Advantages
Sole proprietorship income is reported on the owner-s individual return, neatly sidestepping the double-taxation trap that ensnares C corporations. One tax bill rather than two is always a welcome arithmetic shortcut.
✔️ Minimal Paperwork
Lack of mandated annual reports, board minutes, or state-level compliance drudgery means fewer late nights hunched over filing software. The time saved, however unscientific, can feel like extra breathing room for strategic thinking.
✔️ Flexibility
A founding solo operator can quietly swap the business line into an LLC, S Corp, or even a C Corp as growth dictates, usually with no statutory prescript compelling any specific order. The structure is a moving target as long as owners notify the IRS and applicable state agencies.
⚠️ Cons
❌ Unlimited Personal Liability
Creditors and litigants see you, not an abstract corporate veil, whenever money is owed, and that direct line often includes non-business assets. Your home, personal savings, or next-years-minivan become equity in the judgment ledger the moment a suit drumroll begins.
❌ Difficulty in Raising Capital
Pledging a chunk of personal equity is easy in theory, harder in practice, yet venture checks are usually inked on a stock certificate. Lenders also squint at schedules C and see a single signature tethered to everything the bank might ever need to seize.
❌ Limited Business Continuity
A sole proprietorship ceases to function the instant its owner dies or voluntarily withdraws, creating a hard stop for financial, legal, and operational matters. Because no pre-built chain of succession exists, heirs often scramble to make sense of what survives, and estate-planning lawyers may be called in at the last minute.
❌ Credibility Issues
Vendors, lenders, and even casual customers sometimes peg sole props as the risky cousin of LLCs or corporations, which can color their willingness to commit resources. That perception lingers even when the on-paper numbers are solid, and it may take extra pitches to overcome the mental hurdle.
How to Start a Sole Proprietorship in the U.S.
Opening a sole proprietorship is one of the quickest ways to jump into business. Still, you don’t want to skip the basics or end up in the tax mans crosshairs.
1. Pick a Business Name
You can operate your business under your legal name (e.g., “Maria Lopez”) or select a trade name that better reflects your services (e.g., “Maria’s Marketing Solutions”).
Selecting something other than your legal name usually means filing a DBA (Doing Business As). In many places, people still call it a fictitious name, so don’t let that jargon throw you.
Before you settle on anything:
- Search your states official database to see if another business is already using it.
- Run a quick domain check because a .com that matches your name is worth grabbing.
- Peek at the U.S. Patent and Trademark Office to dodge any future headaches.
2. Register Your DBA (If Using a Trade Name)
In most states, if you’re not using your full legal name, you must register your trade name (DBA) with a county clerk or your state’s business office.
This registration doesn’t provide legal protection like a trademark or LLC but is necessary for legal and tax purposes.
Some states require publishing a notice in a local newspaper to complete the DBA process.
3. Obtain Necessary Business Licenses and Permits
Even though sole proprietorships don’t require state registration, you may still need to obtain:
- General business license for operating legally in your city or county.
- Zoning permits for a physical location.
- Sales tax permits if you’re selling products.
- Professional licenses if your business falls under a regulated industry (e.g., real estate, cosmetology, legal advice, healthcare, etc.).
Each city and state has its own requirements, so it’s best to check with your local government or a trusted service provider like Bizstartz.
4. Apply for an EIN (Employer Identification Number)
As a sole proprietor, you’re not required to have an EIN unless you:
- Have employees
- Operate as a retirement plan administrator
- File excise tax returns
However, having an EIN is a smart idea for separating your personal and business identities. It’s free and easy to get from the IRS and is often required to:
- Open a business bank account
- Apply for business credit
- Work with certain vendors and platforms
5. Open a Business Bank Account
Keeping your business and personal finances separate is essential for accurate accounting and tax filing. A business bank account also helps present a more professional image to clients and vendors.
You’ll usually need:
- Your EIN or SSN
- A DBA certificate (if applicable)
- Proof of business address
Bizstartz can help you open a U.S. business bank account remotely, even if you’re a non-resident.
6. Set Up Accounting and Record-Keeping
Maintaining clear financial records is crucial for monitoring your business performance and preparing for tax season. At minimum, track:
- Revenue and expenses
- Receipts and invoices
- Mileage logs (if using a vehicle)
- Home office expenses
Consider using accounting software like QuickBooks or Wave, or outsourcing your bookkeeping to professionals.
Tax Responsibilities of a Sole Proprietor
Operating as a sole proprietor offers an appealing degree of simplicity at tax time, yet several obligations follow the independence.
Income Tax: The full stream of revenue-profiteer or loss-must be logged on Schedule C and filed alongside the familiar Form 1040.
Self-Employment Tax: Social Security and Medicare premiums-totaling roughly 15.3 percent-cling to the owners bottom line and are calculated via Schedule SE.
Estimated Taxes: If the Internal Revenue Service anticipates a $1,000 liability or greater, the taxpayer is obliged to mail quarterly vouchers lest underpayment penalties accrue.
State and Local Taxes: Jurisdictions beyond Washington may impose sales levies, franchise fees, gross receipts, or their own fiscal tolls.
Consultation with a seasoned accountant or a dedicated filing outfit such as Bizstartz can shield the owner from late surprises and slip-ups.
When Should You Move Beyond a Sole Proprietorship?
A pair of sneakers launch well from a backyard stand, yet growth that strains capacity or invites liability may warrant a shift to an S-corporation, LLC, or other more protective framework.
Switching to a limited-liability company or a corporate charter may warrant consideration when several markers arise:
- A steady uptick in earnings spurs the instinct to protect personal assets from judgment.
- Outside investors or equity partners view a formal entity as an admission ticket.
- Stakeholders-trading customers, lenders, even curious suppliers-often read substance into a suffix such as Inc. or LLC.
- Employees expect payroll schedules backed by an underpinning structure, not a casual side gig.
- Courts and registries are wired to defend whatever name an Article of Organization or Corporate Charter enshrines.
An LLC fuses liability insulation with pass-through earnings treatment; a corporation ratchets up formalities and opens the door to public-share sales.
Formation shops such as Bizstartz can navigate the paperwork maze: Articles, EIN, BOI filings, and initial banking relationships.
Final Thoughts.
The sole proprietorship remains the low-friction entry point for nearly every freelancer or weekend creator, inviting minimal paperwork and no filing fees.
That convenience unravels the moment a client sues or a vendor demands payment, since owners ordinarily stake their personal fortune on business claims.
Bizstartz focuses exclusively on non-resident founders who intend to launch U.S. companies. New entrepreneurs, seasoned executives, and everyone in between find tailored road maps that span formation, compliance, and growth.
Ready to launch your business?
👉 Get in touch with Bizstartz and let us help you start your sole proprietorship or form an LLC today.
