# What Is a Sole Proprietorship?

> **Definition**
>
> A sole proprietorship is an unincorporated business owned by a single individual who is entitled to all profits and responsible for all debts and obligations, making it the simplest form of business structure.

## What Is a Sole Proprietorship?

A sole proprietorship is an unincorporated business with one owner. There is no legal separation between the company and the owner, who receives all profits but is liable for all debts and losses. A sole proprietorship is the easiest type to establish and a popular choice for [small businesses](https://www.investopedia.com/small-business-8611031), individual contractors, and consultants. Most small businesses start as sole proprietorships and either stay that way or expand and transition to a [limited liability](https://www.investopedia.com/terms/l/limitedliability.asp) entity or [corporation](https://www.investopedia.com/terms/c/corporation.asp).

### Key Takeaways

*   A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned.
*   Sole proprietorships are easy to establish and popular with small business owners and contractors.
*   Most small businesses start as sole proprietorships and may transition to a limited liability entity or corporation as the company grows.

![Sole Proprietorship](https://www.investopedia.com/thmb/koKWWolEtxpCZXatfNgYqPqCpu0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/soleproprietorship-Final-578020d8a89e486180a235fe9e76c9e9.jpg)

*A sole proprietorship is one of the easiest ways to start a business with a single owner. — Investopedia / Theresa Chiechi*

## Establishing a Sole Proprietorship

The easiest way to start a one-owner business is through a sole proprietorship. The debts of the sole proprietorship are also the debts of the owner. However, all profits flow directly to the business owner. There are certain steps individuals should take to get started including:

*   Some states require that individuals apply for business or occupancy licenses and permits.
*   States may also require businesses to file a "Doing Business As name" or operate under an assumed name, usually the sole proprietor.
*   Apply for and obtain an [Employer Identification Number (EIN)](https://www.investopedia.com/terms/e/employer-identification-number.asp) for employees or to file tax returns. Some sole proprietors can use their own Social Security Number (SSN). Owners may want to check with a [tax advisor](https://www.investopedia.com/terms/t/taxadvisor.asp) to determine which works best.
*   To sell taxable products, businesses must register for a sales tax license with their state.

### 33.3 Million

The number of small businesses in the United States in 2023. Together, these businesses employed 61.6 million people across the country.

## Sole Proprietorship vs. LLC vs. Partnership

A sole proprietorship is very different from a corporation, a [limited liability company (LLC)](https://www.investopedia.com/terms/l/llc.asp), or a [limited liability partnership (LLP)](https://www.investopedia.com/articles/investing/090214/limited-liability-partnership-llp-basics.asp), in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

When a sole proprietor seeks to incorporate a business, the [owner usually restructures it into an LLC](https://www.investopedia.com/sole-proprietorship-vs-llc-8627981). For this to work, the owner must first determine that the company name is available. If the desired name is free, [articles of organization](https://www.investopedia.com/terms/a/articles-of-organization.asp) must be filed with the state office where the business will be based. The business owner must create an LLC operating agreement defining the business structure. Finally, the new company must obtain an EIN from the IRS.  

![Image](https://www.investopedia.com/thmb/VKk3ceDoGViSNk3aImpevmH28Og=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Sole_Proprietorship_May_2020-01-72456bd5ac0d4c868d8f55a2718dbdd2.jpg)

*— Sabrina Jiang © Investopedia 2020*

## Advantages and Disadvantages

A sole proprietorship requires a limited amount of paperwork to get started. The tax process is simpler because an [employer identification number (EIN)](https://www.investopedia.com/terms/e/employer-identification-number.asp) from the Internal Revenue Service (IRS) is not required and owners can use their Social Security number (SSN) to pay taxes.Income generated from a pass-through business is only subject to a single layer of income tax and, in some cases, may be eligible for a 20% tax deduction until 2026.

An important downside of a sole proprietorship is that it provides no liability protection to the owner. By contrast, an LLC separates business and personal assets and the owner is protected against creditors seizing their assets, such as their home. This [unlimited liability](https://www.investopedia.com/terms/u/unlimited-liability.asp) goes beyond the business entity to the owners themselves. Sole proprietorships must rely on standard funding like bank loans or lines of credit. Banks may view a new business with a small balance sheet as a high-risk borrower.  

Pros

*   No need to obtain an EIN from the IRS
    
*   Quick and easy setup compared with other business structures
    
*   Pass-through tax advantage
    

Cons

*   Personal assets are not separated from business assets
    
*   Difficulty in raising capital
    
*   Owners assume all debt and tax liability
    

> **Important**
>
> The Tax Cuts and Jobs Act (TCJA) of 2017 added a tax break for pass-through entities that essentially allows them to deduct up to 20% of qualified business income. That deduction can result in huge savings and runs until Jan. 1, 2026—unless extended by Congress.

## Taxation

The owner of a sole proprietorship pays [personal income](https://www.investopedia.com/terms/p/personalincome.asp) tax on profits earned from the business. Sole proprietors report their income and expenses on their tax returns and pay income and [self-employment taxes](https://www.investopedia.com/terms/s/selfemploymenttax.asp) on profits. Tax forms include:  

## What Is an Example of a Sole Proprietorship?

Independent photographers, small landscaping companies, freelance writers, or personal trainers are examples of sole proprietorship businesses.

## Is a Sole Proprietorship the Same As Being Self-Employed?

A sole proprietor owns and operates an unincorporated business independent of partners and is solely responsible for the liabilities and tax implications of the business. The sole proprietor is also considered self-employed, however, "self-employed" is a broader term that can be applied to those who work as independent contractors, writers, tradespeople, lawyers, salespeople, and insurance agents. Self-employed individuals generally file an annual income tax return and pay estimated taxes quarterly.

  

## Should Individuals Choose Limited Liability Company or a Sole Proprietorship?

A sole proprietorship is best suited to small businesses with low risk and low profits. Generally, these businesses don’t have a wide range of customers but rather a small, dedicated group. Sole proprietorships often start as hobbies that grow into a business. The reasons to [start a limited liability company](https://www.investopedia.com/how-to-start-an-llc-8631304) (LLC) are that the business entails some liability [risks](https://www.investopedia.com/terms/r/risk.asp), has the potential for large profits and a large customer base, and is positioned to benefit from certain tax structures.

## The Bottom Line

A sole proprietorship is a straightforward way for an individual to start a business. It does not require registering with a state authority for most situations and does not require obtaining an EIN from the IRS. The benefits of simplicity are accompanied by some drawbacks, including all liabilities passed through from the business to the individual and obtaining funding.  

> **Article Sources**
>
> 1.  Internal Revenue Service. “[Form SS-4 & Employer Identification Number (EIN) 1](https://www.irs.gov/faqs/small-business-self-employed-other-business/form-ss-4-and-employer-identification-number-ein/form-ss-4-employer-identification-number-ein-1).”
>     
> 2.  U.S. Small Business Administration Office of Advocacy. “[2023 Small Business Profile](https://advocacy.sba.gov/wp-content/uploads/2023/11/State-Profiles-2023.pdf),” Page 1
>     
> 3.  Internal Revenue Service. “[Topic No. 407 Business Income](https://www.irs.gov/taxtopics/tc407).”
>     
> 4.  Internal Revenue Service. “[Do You Need a New EIN?](https://www.irs.gov/businesses/small-businesses-self-employed/do-you-need-a-new-ein)”
>     
> 5.  Internal Revenue Service. “[Qualified Business Income Deduction](https://www.irs.gov/newsroom/qualified-business-income-deduction).”
>     
> 6.  Internal Revenue Service. “[Sole Proprietorships](https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships).”
>     
> 7.  Internal Revenue Service. "[Self-Employed Individuals Tax Center](https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center#SelfEmployed)."