Sole proprietorship: What it is, how it works and how to start one

Most businesses start the same way: a laptop, a strong cup of coffee and a great idea. But before long, you run into a practical question: how do you choose a business structure? For many entrepreneurs, the simplest place to start is a sole proprietorship.

What is a sole proprietorship?

In plain English, a sole proprietorship is an unincorporated business owned and run by one person.

You and the business are generally the same thing for many purposes, including taxes. There’s no distinction between your personal life and your professional finances. If the business makes $10, you made $10. If the business owes money, so do you.

Imagine someone opening a small neighborhood coffee shop. They sign a lease, buy an espresso machine, hire a few baristas and start serving customers. If they haven’t created a Limited Liability Company (LLC) or a corporation, they’re likely operating as a sole proprietor by default. Even with a website and a company name on the door, legally the business still belongs entirely to that one owner.

This setup is incredibly common. Many restaurants, retail shops, consultants, freelancers and local service businesses start out this way because it’s simple and fast to launch. If you’re ready to turn your side hustle into a formal business, you would usually start with a sole proprietorship. But simplicity also comes with trade-offs. Understanding both sides can help you decide whether this structure fits what you’re looking to build.

What are the advantages of a sole proprietorship?

Most people choose a sole proprietorship because it’s the path of least resistance. When you’re trying to get a business off the ground, the last thing you want is paperwork slowing you down.

It’s easy to start

In many cases, you don’t have to formally create a sole proprietorship at all. If you start doing business on your own — selling products, offering services or sending invoices — you’re likely already operating as one.

That’s because a sole proprietorship is the default structure for a one-person business. If you start earning income independently without registering as another type of entity (like an LLC or corporation), the law generally treats you as a sole proprietor.

That’s a big reason first-time business owners often begin here. You can start small, test an idea and build momentum before worrying about more complex structures.

You’ve got full control and flexibility

With a sole proprietorship, you’re the decision-maker. You set the prices, choose the suppliers and decide whether to expand the menu, redesign the website or open earlier on weekends. There’s no board meeting required — just your judgment.

That also means you can move quickly as the business evolves. If something isn’t working, you can adjust services, pricing or strategy without navigating formal corporate processes.

Startup costs are minimal

Forming an LLC or corporation often involves registration fees, legal filings and ongoing compliance requirements. A sole proprietorship usually avoids much of that early cost. For entrepreneurs launching a small shop, freelance practice or consulting business, the low barrier to entry can make getting started far more accessible.

Taxes are straightforward (but plan ahead)

Compared with other business structures, tax management is usually simpler for sole proprietorships. Instead of filing a separate corporate tax return, business income typically passes through to your personal tax return. In other words, the business earnings show up alongside your personal income on a Schedule C.

For the owner of that neighborhood coffee shop, it means reporting profits and expenses as part of their individual taxes rather than managing an entirely separate filing system.

Heads up: When you work a traditional job, your employer pays half your Social Security and Medicare taxes, and you pay the other half. As a sole proprietor, you’re both the employer and the employee. That means you may be responsible for the full self-employment tax, currently 15.3%.

Many business owners get in the habit of setting aside around 25%–30% of what they earn for taxes throughout the year. Sole proprietors typically make estimated quarterly tax payments to the IRS rather than waiting until they file, which helps keep tax obligations more predictable.

Disadvantages of a sole proprietorship

Of course, the same simplicity that makes sole proprietorships attractive also introduces some risks. Before choosing this path, it’s worth understanding what comes with it.

You generally have unlimited personal liability

What you are personally liable for is the biggest consideration. Because the business and the owner are generally considered the same entity, there’s no separation between business obligations and personal responsibility.

In practice, that means contracts, leases and loans are typically signed in the owner’s name. If the business runs into financial trouble or faces a legal claim, personal assets — like your car, savings or other property — could be at risk.

It can be harder to raise funding

Similarly, because you and the business are the same, your personal credit score is the gatekeeper for everything. If the business needs a loan or a credit card, the bank is looking at your personal FICO score, since the business doesn't have its own reputation yet.

Sole proprietors typically rely on their individual savings or personal loans because they can’t sell ownership shares in the same way corporations can. Investors often prefer business structures that provide clearer ownership and legal protections.

The owner carries the workload

Sole proprietors wear a lot of hats. In most cases, the owner handles — or oversees — nearly every part of the business. For our new coffee shop owner, that might mean managing staff schedules in the morning, reviewing supplier invoices in the afternoon and working the counter during the morning rush.

Many entrepreneurs enjoy that level of control. But it also means the business relies heavily on one person to keep things running.

Growth may require a new structure

As the business expands — by adding partners, attracting investors or scaling operations — you may eventually outgrow the limits of a sole proprietorship.

That’s not a problem. It’s a common evolution. Many owners start as sole proprietors and later transition to an LLC or another structure as revenue grows, liability risks increase or the business becomes more complex.

Continuity is another factor to consider. A sole proprietorship is tied directly to the individual who owns it. Because the business isn’t legally separate, it doesn’t easily transfer or continue on its own. This is perfectly workable for many small businesses. But if your long-term goal is to bring in partners, sell the business one day or pass it down to someone else, a structure like an LLC or corporation can make those transitions much easier.

How to start a sole proprietorship

If you decide a sole proprietorship fits your business, getting started is typically straightforward. The exact steps can vary depending on your location and the type of business you’re building, but the overall path will look similar.

Choose a business name

Some owners operate under their personal name. Others choose a separate business name to give the brand its own flavor.

If you use a different name, you’ll likely need to register a “doing business as” (DBA) with your local government. It’s a formal way of letting the state and your bank know that you are the person behind the brand.

Open a dedicated business bank account

While sole proprietors can use personal accounts, opening a dedicated business checking account is almost always the smarter move. It’s much easier to keep your records separate — and avoid confusion at tax time — when business expenses and personal purchases aren’t appearing on the same bank statement.

A dedicated business account simplifies your bookkeeping and also helps present a more professional image to clients and vendors from day one.

Apply for an employer identification number (EIN)

Many sole proprietors use their Social Security number for tax purposes. However, applying for an EIN can add an extra layer of privacy and may be required if you hire employees.

Think of an EIN as a Social Security number for your business. You apply on the IRS website and once you receive your number, it keeps your personal SSN off every invoice you send out.

If your business grows to the point where you need help, you can bring on staff just like any other business. At that point you’re required to register an EIN and will be responsible for payroll taxes and other employment requirements.

Check for local licenses and permits

Depending on your industry and location, your business may need certain licenses or permits to operate legally. A consultant may need just a general business license, while a café owner will need health permits and food safety certifications. Knowing these requirements early can help avoid surprises once you’re ready to open.

Consider business insurance

Insurance isn’t specific to sole proprietorships, but it’s worth considering as you set up your business. Since your personal assets are on the line in a sole proprietorship, a general liability policy can help protect your savings if a customer slips in your café, or you accidentally damage a client’s property.

Insurance doesn’t change your business structure, but it can provide an additional layer of protection as your business gets off the ground.

Sole proprietorship FAQs

If you’re still weighing your options, here are some of the most common questions people ask when deciding on a sole proprietorship.

What is a sole proprietorship vs. an LLC?

The main difference between a sole proprietorship and an LLC is legal separation. In a sole proprietorship, the owner and business are the same entity. An LLC creates a separate legal entity that can help protect personal assets from business liabilities.

How do I start a sole proprietorship?

Many people automatically begin operating as sole proprietors when they start doing business on their own. From there, you can register a business name, obtain any required permits and open a business bank account to manage finances.

How many owners can a sole proprietorship have?

A sole proprietorship can only be owned and controlled by a single individual. If multiple owners want to run a business together, they typically form a partnership or LLC instead.

Why would someone choose a sole proprietorship?

Many entrepreneurs choose a sole proprietorship because it’s easy and inexpensive to start and gives the owner full control over how the business runs. It’s the most common structure for freelancers, consultants and small service businesses.

What are the risks of being a sole proprietor?

The main risk of a sole proprietorship is personal liability. Because the business isn’t legally separate, the owner may be responsible for business debts or legal claims.

Does a sole proprietor need a separate bank account?

Although it’s not always legally required, a separate business bank account is usually recommended. Having separate personal and business accounts helps keep finances organized and can simplify bookkeeping and tax preparation.

What are the tax benefits of a sole proprietorship?

Taxes for sole proprietorships are often simpler because business income is reported on the owner’s personal tax return rather than through a separate corporate filing.

Is a sole proprietorship right for you?

A sole proprietorship can be a good fit if you’re starting a business on your own — such as a freelancer, consultant or small service provider — and you want the simplest way to get up and running.

This structure may be less ideal if you’re entering a higher-risk industry, plan to bring on partners or investors or want stronger separation between your personal finances and your business. In those situations, an LLC or corporation may offer additional protection and more flexibility to expand.

If you’re getting ready to launch something of your own, a Chase banker can help you set up the accounts to manage your business finances and keep your personal and business finances separate from day one.