How to Start a Sole Proprietorship: Simple Guide

How do I start a sole proprietorship? To start a sole proprietorship, pick a business name (file a DBA if it differs from your legal name), get an EIN if you have employees or want one for banking, apply for any required local business licenses and a sales tax permit if you sell taxable goods, open a separate business bank account, and start tracking income on Schedule C for your personal tax return.

A sole proprietorship is the simplest, cheapest, and fastest way to start a business in the United States. There is no state filing, no separate tax return, and almost no paperwork — you are legally in business the moment you start selling. The trade-off is real: you and the business are legally the same entity, which means business debts and lawsuits can reach your personal assets. This guide walks through how to start a sole proprietorship the right way, when it makes sense, and when to upgrade to an LLC.

What Is a Sole Proprietorship?

A sole proprietorship is an unincorporated business owned and run by one person. You and the business are the same legal and tax entity — there is no separation between personal and business assets at the federal level. Anyone who starts selling goods or services as an individual, without forming an LLC or corporation, is automatically a sole proprietor. There is no formal “registration” of the sole proprietorship itself with the state.

If you have ever earned freelance income, sold items online, or done consulting work without forming an entity, you have already been operating as a sole proprietor — whether or not you knew it. The IRS expects you to report that income on Schedule C of your personal Form 1040.

Step-by-Step: How to Start a Sole Proprietorship

Choose your business name. If you operate under your legal name, no registration is needed. If you operate under a trade name (DBA), file a DBA / fictitious name certificate with your county or state.
Get an EIN (optional but recommended). Free from the IRS. Apply at how to get an EIN. Required if you hire employees; recommended for opening bank accounts so you do not have to share your SSN with vendors.
Apply for required licenses and permits. Almost every business needs at least a local general business license. See how to get a business license for the full process.
Register for a sales tax permit if you sell taxable goods. See sales tax permit guide.
Open a separate business bank account. Even though the sole proprietorship is legally the same as you personally, a dedicated account makes bookkeeping cleaner and protects against IRS challenges to your business deductions.
Set up bookkeeping. Pick software (QuickBooks Self-Employed, Wave, FreshBooks) or use spreadsheets and our free bookkeeping templates.
Buy business insurance. General liability insurance, professional liability (E&O), and any industry-specific coverage. Critical since you have no entity-level liability shield.
Start tracking income and expenses. Save every receipt, log every mile, and reconcile your bank account monthly.

Sole Proprietorship Costs

Item	Cost	Notes
State business registration	$0	No filing required
DBA / fictitious name	$10 – $150	Only if using a trade name
EIN	$0	Free from the IRS
Local business license	$50 – $400	Varies by city/county
Sales tax permit	$0 – $100	Most states free
Business insurance	$30 – $200/month	Highly recommended
Business bank account	$0 – $25/month	Many free options

Sole Proprietorship Taxes

The tax filing for a sole proprietorship is simple:

Schedule C (Form 1040): Report business income and expenses on your personal tax return.
Schedule SE: Calculate self-employment tax (15.3% on net profit up to the Social Security wage base).
Form 1040-ES: Quarterly estimated tax payments if you expect to owe $1,000+ at year-end.
State income tax return: Most states require business income reporting on your personal state return.
Sales tax returns: Monthly, quarterly, or annual depending on your state and volume.

You pay both the employee and employer halves of Social Security and Medicare (the “self-employment tax”) on the business profit. This is a significant cost — 15.3% on top of income tax — and is one of the main reasons profitable sole proprietors eventually upgrade to an LLC with S-corp election. The IRS publishes the full self-employed guide at irs.gov/businesses/small-businesses-self-employed.

Liability Risk

This is the biggest downside of a sole proprietorship. Because you and the business are legally the same entity:

A customer who sues your business is suing you personally
A vendor you cannot pay can come after your personal savings, car, and house
An employee injured on the job can pursue your personal assets if workers’ comp lapses
A judgment against the business is a judgment against you

The mitigation: business insurance. General liability, professional liability, and (if applicable) product liability and commercial auto insurance shift the financial risk to the insurer. But insurance has limits and exclusions — for anything beyond very low risk, the LLC is the better answer. See our comparison of LLC vs sole proprietorship to evaluate the trade-off.

Sole Proprietorship vs LLC for a Side Hustle

The most common scenario: someone starts a side business earning a few hundred dollars per month. Do they need an LLC? Here is the trade-off:

Stay a sole proprietor if: The activity is low risk (writing, design, tutoring), revenue is under $20,000/year, and you have no employees. The LLC is overkill at this scale.
Upgrade to an LLC if: Revenue is climbing past $30,000+, you have any physical interaction with customers, you handle other people’s property or data, or your industry has typical liability claims (food, transportation, construction, healthcare).

Branding and DBA

If you operate under your legal name (e.g., “Sarah Smith Consulting”), you do not need to register the business name with anyone. If you want to operate under a trade name (e.g., “Bright Path Consulting”), you file a “doing business as” (DBA) certificate with your county or state. The DBA costs $10–$150 and lasts 1–5 years before renewal. See our guide on how to register a business name for the full DBA process.

Banking and Bookkeeping

Even though a sole proprietorship is not a separate legal entity, having a dedicated business bank account is essential. Reasons:

Cleanly separates business and personal transactions for the IRS
Required by many payment processors (Stripe, PayPal Business, Square)
Strengthens deductibility of business expenses
Builds business credit history
Makes the leap to an LLC easier when you outgrow the sole prop

Most banks let sole proprietors open accounts with just an SSN, an EIN, and a DBA certificate (if you have one). Some online-only banks (Bluevine, Relay) accept sole proprietors with just an SSN and ID.

Hiring Employees as a Sole Proprietor

You can hire employees as a sole proprietor, but the liability risk multiplies. Steps to take:

Get an EIN (required for any business with employees).
Register with your state’s employer tax agency for unemployment insurance.
Buy workers’ compensation insurance (required in nearly every state).
Set up payroll (Gusto, ADP, OnPay, QuickBooks Payroll) to handle withholdings and filings.
Have every new hire complete W-4 and I-9 forms.
Consider upgrading to an LLC — the liability exposure is significantly higher with employees.

Common Mistakes

Co-mingling personal and business funds. Loses the cleanest record of business activity and makes IRS audits painful.
Not paying quarterly estimated taxes. Triggers underpayment penalties at year-end.
Skipping the EIN. Sharing your SSN on every W-9 is unnecessary and risky.
No business insurance. A single customer claim can wipe out personal savings.
Staying a sole proprietor too long. Once revenue is consistent and risk is non-trivial, the LLC’s $50–$500 annual cost is cheap insurance.
Ignoring sales tax. Even small sellers can owe sales tax in their home state.

How to Save on Sole Proprietorship Taxes

Sole proprietors have access to most of the same deductions as larger businesses, plus a few that are particularly valuable for solo operators. Key deductions to track:

Home office. If you have a dedicated workspace at home, deduct the proportional rent/mortgage interest, utilities, and depreciation.
Vehicle expenses. Either actual costs or the standard mileage rate ($0.67/mile in 2024). Maintain a contemporaneous mileage log on paper or with a tracking app — the IRS expects to see dates, miles, and business purpose for each trip if you are audited.
Health insurance premiums. Self-employed health insurance is fully deductible from gross income.
Retirement contributions. SEP-IRA, Solo 401(k), or SIMPLE IRA contributions reduce both income tax and self-employment tax. Solo 401(k) plans allow the largest contributions for solo owners — typically up to $69,000 in 2024 between employee and employer portions.
Education and training. Courses, books, and certifications relevant to your business.
Subscription software. Accounting, design, productivity tools.
Business meals. 50% of qualifying meals while traveling or with clients.

Track every expense category from day one with the same accounting software you use for the bank account. Year-end tax preparation is dramatically easier when every expense is categorized in real time.

When to Convert to an LLC

The signals it is time to upgrade:

Revenue exceeds $25,000–$50,000 per year and is growing
You hire your first employee or contractor
You sign your first large customer contract
You lease a commercial space
You take on debt or financing
You face a real risk of being sued (physical product, customer interaction, regulated industry)

Converting from a sole proprietorship to an LLC is straightforward. See our step-by-step guide on converting a sole proprietorship to an LLC for the full process.

Documents Every Sole Proprietor Should Keep

DBA certificate (if applicable)
EIN confirmation letter (CP 575)
Local business license
Sales tax permit (if applicable)
Insurance policy declarations
Bank account statements
Receipts for every business expense over $75
Mileage log if you use a personal vehicle for business
Annual income and expense summary
Schedule C and supporting backup for the past 7 years

For the master list, see our documents you need to start a business guide.

Sole Proprietorship Pros and Cons

Pros

Fast and free to start. No state filing fees and no waiting.
Simple taxes. Income flows to Schedule C on your personal 1040.
Total control. No partners, no votes, no committees.
Minimal ongoing paperwork. No annual reports, no operating agreement, no board minutes.
Easy to wind down. Stop operating and close the licenses — no formal dissolution required.

Cons

Unlimited personal liability. The biggest risk and the main reason to upgrade.
Hard to raise money. Investors and most lenders prefer LLCs or corporations.
Lower credibility. Some customers and vendors view sole proprietors as less established.
Pays full self-employment tax. No way to split income into salary + distributions.
Limited brand protection. The business name is not registered with the state.

Common Sole Proprietorship Business Types

Freelance writers, designers, photographers
Consultants and coaches
Personal trainers, tutors, music teachers
House cleaners, lawn care providers, handymen
Online sellers (small-scale Etsy, eBay)
Dog walkers, pet sitters
Bookkeepers and tax preparers (solo)
Real estate agents (in some brokerage structures)

Frequently Asked Questions

Do I need to register a sole proprietorship?

You do not register the sole proprietorship itself — it exists the moment you start selling. You may need to register a DBA, apply for local business licenses, and register for a sales tax permit, but the entity itself is automatic.

Can a sole proprietor have employees?

Yes, but the liability exposure increases significantly. You will need an EIN, workers’ compensation insurance, state unemployment registration, and a payroll system. Most owners upgrade to an LLC before or shortly after hiring.

Is a sole proprietorship a separate legal entity?

No. You and the sole proprietorship are the same legal and tax entity. This is why business debts and lawsuits can reach personal assets — and why most owners eventually form an LLC for the legal separation.

Closing a Sole Proprietorship

Closing a sole proprietorship is just as simple as starting one. Stop operating, file a final Schedule C with your year-end return, close any state sales tax accounts by filing a final return, surrender business licenses, cancel insurance policies, and pay any remaining vendor invoices. If you had an EIN, optionally request that the IRS close the EIN by mailing a letter — though leaving it open does not create ongoing obligations as long as you stop filing under it. Save records for at least seven years after closure in case the IRS audits a prior year.

Next steps: if revenue is growing, see our guide on LLC vs sole proprietorship and how to start an LLC.