What Is a Sole Proprietorship?

Learn everything there is to know about DBAs and why you might need one.

sole proprietorship is an informal business that isn’t legally separated from its owner. 

A sole proprietor is personally liable for any debts incurred by the business, including debts incurred as a result of a lawsuit.

Because of this, sole proprietorships are only useful for businesses with very low profit and risk. Learn more in our What is a Sole Proprietorship guide below.

Recommended: Visit our Sole Proprietorship vs LLC guide to learn if you should form a limited liability company (LLC) to protect your personal assets.

Sole Proprietorship Meaning

A sole proprietorship is an unincorporated business. Legally speaking, there is no distinction between a sole proprietor and their business. You become a sole proprietor simply by conducting business.

Profit and loss are reported on the sole proprietor’s tax return, and the business owner is personally liable for all debt and risk.

Sole proprietorships are useful for small businesses with the following traits:

  • They MUST be low-profit and low-risk (low chance of liability or financial loss).
  • They have a smaller customer base — usually friends, family, and neighbors.
  • They sometimes start as hobbies like blogging, photography, or video streaming.

Sole Proprietorship Examples

Any low-profit/low-risk business operated by one person can be a sole proprietorship.

For example, tutors, artists, counselors, and musicians are all professions that could potentially run as sole proprietorships.

Running a Sole Proprietorship

If you’d like to operate a sole proprietorship using any name other than your given name, you’ll need to get a “doing business as” (DBA) name. This will allow you to use an assumed name for branding and banking purposes.

You can file an DBA today with the help of our free How to File a DBA guide or with one of these trusted DBA filing services.

EINs and Hiring Employees

Sole proprietorships are usually one-person businesses, but they can hire employees if the owner obtains an Employer Identification Number (EIN).

Sole Proprietorship Taxes

A sole proprietorship isn’t a legally distinct business entity — your business income as an owner is included on your personal tax return. Remember that as a sole proprietor, you’re technically self-employed, so you’ll need to pay income tax and self-employment tax each year.

Advantages and Disadvantages of Being a Sole Proprietor

There are times when operating a sole proprietorship makes sense versus a legal business structure like an LLC or a corporation.

A sole proprietorship is only safe for business owner that is doing business on a small scale or who want to try out a low-risk venture to see how successful it will be.

Sole proprietorship Advantages:

Sole proprietorships offer one advantage—they don’t require any formal filing requirements or fees to get started. While this might be appealing to many business owners, there is a catch—sole proprietors don’t have any personal asset protection if the business suffers a loss.

This means a sole proprietor’s house, car, or personal savings could be lost if the business suffers a loss (either by creditors or lawsuits).

Sole Proprietor Disadvantages:

  • Zero Personal Liability Protection. Your personal assets (car, house, bank account) could be at risk in the event your business suffers a loss.
  • Zero Tax Benefits. Sole proprietors pay taxes on their profits and also pay full FICA taxes (Medicaid and Social Security taxes). When your business becomes profitable, taxes will become expensive.
  • Limited Growth Potential. When a business becomes more profitable, risk increases. When risk and profit increase, so does the need for a legal formal business structure.
  • Reduced Credibility and Branding Opportunities. A sole proprietor must invoice, receive payment, open a bank account, and market with their surname unless their state allows them to register and maintain a doing business as (DBA) name.

You can avoid these issues by forming a limited liability company (LLC). An LLC is a simple and inexpensive business structure to form, and it provides personal asset protection.

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