What is a sole proprietorship business? Definition, examples, benefits

Some entrepreneurs may not need to incorporate a business. Anyone who operates a business without filing a company is a sole proprietor. Around 86.6% of non-employers in the United States are sole proprietors.¹

Some owners may prefer operating as a sole proprietor. This structure is simple and gives the owner autonomy. If you decide to operate as a sole proprietor, however, there are many important tax and legal implications worth knowing about.

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What is a sole proprietorship business?

Most people interested in entrepreneurship have heard the term sole proprietorship many times. So what type of business is a sole proprietorship?

Simply put, a sole proprietorship is any type of business, small or large, that one person runs.

A sole proprietorship in business is an unincorporated business structure. Anyone who operates a business is a sole proprietor until they incorporate a company. There is no distinction between the business and the owner with this structure. This business structure is an easy option for entrepreneurs.

Many single entrepreneurs choose to operate as a sole proprietor. Anyone who wants to name their business needs to file a DBA (doing business as). If not, they can operate under their own name.

What are 5 characteristics of a sole proprietorship?

It is easy to understand what determines if a business is a sole proprietorship. There are several common characteristics of sole proprietorships.

The main distinction is that there is no formal incorporation requirement. Most people choose to be a sole proprietor because of the convenience and low costs.

However, operating as a sole proprietor can make you vulnerable to legal issues. It may be riskier for some businesses to operate as sole proprietors.

Complete control: A sole proprietor has complete control over their business operations. They do not need to elect a board or other members. Sole proprietors own 100% of their business and control all aspects of the company’s operations.

No Separation: There is no separation between the owner and the business. A sole proprietor files their business activity under their personal 1040 tax return. Sole proprietors can use their personal bank accounts if they want.

Personal Liability: Sole proprietors are liable for their company’s debt. If someone decides to sue the business, the owner is personally liable. The owner may need to use their personal assets as collateral for a loan.

Taxation at the individual level: Individuals pay social security and Medicare taxes on their net income. Sole proprietors can deduct any business expenses from their revenue.

Easier requirements: Sole proprietors do not incorporate a company. They only need to file a DBA if they want to use a different name. Sole proprietors do not have reporting requirements. They only need to file taxes every year.

Pros and cons of a sole proprietorship business

Deciding whether to operate as sole proprietor can be a challenging choice. There are many pros and cons to consider.

Most small business owners operate as sole proprietors because of the easier requirements. Sole proprietors do not need to incorporate a company or file separate taxes. They do not need to worry about filing annual reports and paying state franchise taxes. Some companies, in states like California, pay over $800/year for these reports.²

Solo-entrepreneurs may prefer the ease and convenience of operating as a sole proprietor.

The main downside to consider is the extra liability that you face. If someone sues your business, you are personally liable. Moreover, the owner is also liable for any of the company’s debt. By contrast, someone who files an LLC has an extra layer of legal protection.

If you want to raise money from investors, it may not be a good idea to be a sole proprietor. Sole proprietors can’t issue shares to raise capital. However, if you want to maintain control over your company, operating as a sole proprietor can be a good option.

If you are unsure, it is easy to change your mind later. Sole proprietors can incorporate their businesses later as they continue to grow. They can also decide to form a partnership with another person.

What is a major advantage of a business that is a partnership rather than a sole proprietorship?

A sole proprietorship is not always the best option. In some cases, it may be better for an entrepreneur to form a partnership. Operating as a sole proprietor can be more challenging and limit growth prospects.

A partnership allows 2 entrepreneurs to share intellectual and financial resources. In some cases, it may be easier for individuals to succeed if they form a partnership.

Partnerships can typically gain access to more capital. Banks and other creditors are more likely to lend more money to a partnership. Both owners can also finance projects together.

Partnerships are also very easy to establish. Individuals do not always need to incorporate an entity. Even a written or verbal agreement can be enough to legally form a partnership.

Filing taxes as a partnership is also easy. Both partners can also file their tax returns separately.

However, both partners are liable for the other person’s debt. If the business can’t pay its debt, the creditors can take action against any business owner.³

Forming a partnership can help take your growth to the next level. However, doing this can create extra legal work for the entrepreneur. Many entrepreneurs start as sole proprietors and then form a partnership after collaborating with another entrepreneur later.

How do sole proprietors get taxed?

Sole proprietors need to pay social security and Medicare taxes on their net profit. The total tax rate for sole proprietors is 15.3% if they make less than $132,900. 12.4% goes towards social security tax, and 2.9% goes toward Medicare.⁴

Sole proprietors need to report their taxes on their personal tax returns. They do not need to file a separate business tax return. It is crucial that sole proprietors only list expenses directly related to their business. You can’t typically deduct personal, living, and family expenses when filing your taxes as a sole proprietor.⁵

If you sell physical products, you need to collect and pay sales taxes. These taxes will vary based on your physical location and where you sell the products.

If your sole proprietorship hires employees, you will be responsible for paying employee taxes. You also need to file a 1099 form If you hire contractors and pay them more than $600.

It is also a good idea to keep physical or electronic records of your expenses. Doing this can make it less stressful if you are audited.

What is an example of a sole proprietorship?

If you are wondering what type of business is a sole proprietorship, you may be surprised at some common examples.

Sole proprietorships are very common. Larger companies like Amazon initially started operating as sole proprietors. Even some individuals who make money off of their hobbies are sole proprietors.

You are likely already familiar with many types of sole proprietors. These can include freelance graphic designers, dentists, lawyers, artists, farmers, plumbers, and cleaners.

Any individual that operates a business is a sole proprietor. To determine what the legal name of a sole proprietorship is, you will need to see if the business filed a Doing Business As (DBA) name already.


If they do not file a DBA, the individual must operate under their own name. Many sole proprietors may prefer to operate under their own name. Others may create a formal business name by filing a DBA.

Converting a sole proprietorship to an LLC: What to consider

As your business grows, you may decide that it is the right decision to convert your business to an LLC.

Some sole proprietors decide to form an LLC for the following reasons:

• Protect your personal assets: As your business increases its debt, it may make sense to form an LLC. Doing this can protect you if you default on your loan.
• Adding business partner: If you decide to add new owners or partners to your business, you can form an LLC.
• S-corp election: LLCs can choose to be taxed like a corporation. Filing as an S-corp can help you lower your company’s taxes.
• Raising money/loans: Filing an LLC can make it easier to raise money or secure a loan.
• Hiring: If you want to hire employees, it may be better to form an LLC.

You can file an LLC directly through the Secretary of State or use a company like LegalZoom or Incfile. If you form an LLC, you will need to file articles of organization and create an operating agreement. The IRS will also assign you a new EIN, which you will use on your tax returns.

Finally, you will need to decide how you want to be taxed. If you do nothing, you will file as a disregarded entity. If you want to pay taxes at the corporate level, you will need to file Form 2553. Once you file this form, your business will be a corporation. If you are a disregarded entity, you will file your business activity on your personal tax return.

LLCs that are classified as S-corps enjoy extra benefits relative to partnerships and LLCs that are disregarded entities.

Looking to form a business? Discover the Wise Business account

If you are a sole proprietor, creating a Wise Business account can help you save time and money. Sole proprietors do not always need a separate business account, however, it’s good practice. Having a separate account can help you separate your personal and business expenses.

It’s easy to open a Wise Business account online. You’ll just need to submit information about your business online, and include supporting documentation.

Find out more about Wise Business

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1. Switching-from-a-sole-proprietorship-to-an-llc
2. California LLC taxes
3. Business partnerships
4. Sole proprietorship taxes
5. IRS - income expenses