Should I Start a Sole Proprietorship?
Written by Law on Call Staff | Last Updated September 8, 2025
Ready to start a business today? You might be ready to launch as a sole proprietor.
We’ll walk you through the need-to-knows of this simple business structure to help you decide if it’s right for you. And if you still have questions? We’re here to answer them.
Main Takeaways
- A sole proprietor and their business are legally one and the same.
- If you sell goods or services and haven’t filed business formation paperwork with your state, you’re likely a sole proprietor.
- Sole proprietors typically pay quarterly taxes and file annual returns.
What Is a Sole Proprietor?
A sole proprietor is an individual who does business without forming a separate legal entity. There no legal separation between the business and its owner. This means business profits, losses, debts, and legal entanglements all rest squarely on the owner’s shoulders.
Most U.S. businesses are owned by sole proprietors because they’re simple to set up. There’s no formal documentation required to get started, as there is when you start a corporation or form an LLC. There are also no state filing fees or ongoing annual report fees involved.
sole proprietor vs. independent contractor
Sole props and contractors have some overlap, and a person can be both at once.
- Independent contractors are hired by clients to perform a specific service.
- Sole proprietors might be hired by clients, but they may also make money by selling goods.
This distinction has tax implications. Clients who pay independent contractors $600 or more are required to send them Form 1099-NEC. If a sole proprietor is not hired by clients and makes money solely by selling goods, they will not receive this form.
Can a sole proprietor Hire employees?
Yes! If you hire employees you’ll need to get an EIN and account for additional tax obligations.
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How to Start a Sole Proprietorship
To start a sole proprietorship, you typically just need to start making sales. No business formation paperwork or fees required.
That said, some states may require alternative documentation. For example, Idaho requires all businesses to report their name and entity type with the state prior to conducting business.
Anything else before getting started?
Here are some key considerations when launching as a sole prop:
Naming Your Business
By default, your business name is your name (because you are the business). But you can also operate under a DBA (Doing Business As) name. If you go this route, you’ll likely need to register the name with your state and/or local jurisdiction.
When naming your business, check your state’s rules to avoid including any words you shouldn’t. For example, most states prohibit including the word “incorporation” in a business name unless the business is actually incorporated.
Getting a Business License
Many states require sole proprietors to obtain business licenses. These may be required at the state, county, or city level. For example, Utah requires all businesses to obtain a license in the city and/or county where they operate.
Paying Taxes
Remember that when you work for yourself, your taxes aren’t automatically deducted from a paycheck by your employer. You’re responsible for keeping track of how much you owe and paying it as necessary. More on that below.
Filing Taxes As a Sole Proprietor
As a sole proprietor, your business income is taxed as personal income. Your business does not pay separate taxes because there is no legal distinction between you and your business. All business-related tax forms are included with your personal return.
What tax do I owe?
As a sole proprietor, you’ll generally owe the following taxes:
- Federal income tax
- State income tax (if applicable)
- Self-employment tax (goes to Social Security and Medicare)
when are my taxes due?
Sole prop tax payments are generally due in estimated quarterly installments. Your annual tax return filing, however, is due in April at the same time as everyone else’s. If your quarterly payments are short, you may need to pay a penalty upon filing.
If you have employees, their W-2s must typically be filed by January 31.
Frequently Asked Questions
No. Sole proprietors do not have to file annual or biennial reports with their state, unlike LLCs and corporations, which are often required to do so.
Yes. There are a few common loan options available:
- SBA loans (issued by private lenders and backed by the federal government) exist specifically for small businesses, including sole proprietorships.
- Bank loans are another option, though they can be harder for sole proprietors to get, depending on whether business credit has been established and how good the sole proprietor’s personal credit score is.
- Another route is to get a business line of credit—where loans are given in lump sums, lines of credit have a limit that can be pulled from as needed.
No. As a sole prop, the IRS sees no difference between you and your business, and so whatever money your business earns (minus expenses) is part of your income.
Not necessarily. In most cases, a sole proprietor can use their social security number in place of an employee identification number (EIN). However, you may need an EIN to open a business bank account, and you will need an EIN if you decide to hire employees. Additionally, some states may require EINs on business license applications.