A sole proprietorship is the simplest and most common business structure in the United States. It's unincorporated, meaning it has no legal existence separate from its owner. You and your business are the same legal entity. Every dollar of profit flows directly to your personal tax return, reported on Schedule C of Form 1040. You pay income tax on that profit, plus self- employment tax — which covers both the employee and employer portions of Social Security and Medicare, totaling 15.3% on the first $176,100 of net earnings and 2.9% on anything above that threshold in 2025.

The structure is simple and inexpensive. The tradeoff is that there's no liability shield. If a client sues your business, they're suing you. Your personal assets — your bank account, your car, your home — are all potentially reachable by a judgment creditor.

Operating under your own full legal name — "Jane Doe Consulting," for instance, if your name is Jane Doe — requires no special registration in most jurisdictions. But if you want to operate under a business name that doesn't include your legal name (say, "Coastal Marketing Agency"), you'll need to register a DBA, which stands for "doing business as." DBAs are also called assumed names, trade names, or fictitious business names depending on the state.

DBA registration is typically handled at the county clerk's office or state Secretary of State's office, depending on your state. Fees run $10–$100. Some states require you to publish a notice in a local newspaper as well. The registration gives you the legal right to operate under that name and, importantly, allows you to open a bank account in the business name.

Technically, sole proprietors without employees can use their Social Security number for all business purposes. In practice, you should get an EIN anyway. Using your SSN for business transactions — providing it to clients, vendors, or banks — increases your risk of identity theft. An EIN costs nothing (apply free at irs.gov in about 10 minutes), and most business bank accounts and payment processors require one.

You're required to have an EIN if you:

Have or plan to hire employees Open a Keogh retirement plan Operate certain types of businesses (alcohol, tobacco, firearms) Are required to file certain business excise tax returns Even if none of those apply, get the EIN. It's a low-effort step with real practical benefits.

Many sole proprietors skip this step because they feel it's unnecessary when they're "just freelancing." That's a costly mindset. Mixing personal and business funds makes tax time dramatically more complicated, makes it harder to track true business profitability, and undermines your ability to demonstrate legitimate business expenses if you're ever audited.

Open a separate checking account in your business name — or in your personal name with a clear business designation — and run all business income and expenses through it. This one habit alone will save you hours every tax season.

Even without an LLC or corporation, you may have state tax obligations depending on what you sell and where you operate.

If you sell physical goods, most states require you to collect and remit sales tax — which means registering for a seller's permit with your state's department of revenue. This is free in most states. If you operate in a state with gross receipts taxes (like Ohio or Washington), you may need to register and file regardless of your business structure.

If you have employees, you'll need to register with your state for payroll withholding, unemployment insurance, and workers' compensation.

Operating legally as a sole proprietor often requires licenses beyond simply "starting a business." The specific requirements depend heavily on what you do and where you operate:

General business license: Many cities and counties require any business operating within their limits to hold a general business license, typically renewed annually. Fees range from $25 to several hundred dollars depending on location.

Professional licenses: If you work in a licensed profession — healthcare, law, accounting, cosmetology, real estate, contracting, and dozens of others — you need the appropriate state- issued license regardless of your business structure. Your sole prop status doesn't waive professional licensing requirements.

Home occupation permit: If you're running your business from home, your municipality may require a home occupation permit to confirm you're not violating zoning ordinances. This is especially relevant if clients come to your home.

The best resource for permit research is your state's official business portal (searchable via SBA.gov) and your city or county government website.

As a sole proprietor, you're responsible for managing your own taxes — no employer is withholding anything for you. There are two key obligations to understand:

Quarterly estimated taxes: If you expect to owe $1,000 or more in federal taxes for the year, you must make quarterly estimated tax payments using IRS Form 1040-ES. The 2025-2026 due dates are typically April 15, June 15, September 15, and January 15. Missing these payments triggers underpayment penalties.

Self-employment tax: This is the 15.3% mentioned above. The good news: you can deduct the employer-equivalent portion (half of the SE tax) as an adjustment to income on your personal return. You can also deduct the cost of health insurance premiums if you're self-employed and not eligible for coverage through a spouse's employer plan.

Schedule C: This is where you report business income and deductible expenses. Legitimate deductions include home office (if you have a dedicated space used exclusively for business), vehicle mileage, equipment, software subscriptions, professional development, and business- related travel.

The soul of a sole proprietorship is simplicity, and there's real value in that — especially when you're starting out, revenue is modest, and you're still finding your footing. But it's worth taking 30 minutes to honestly assess your exposure.

Do you have clients who could claim you harmed their business? Do you handle sensitive data? Do you provide any kind of advice that could be challenged if things go wrong? If the answer to any of those questions is yes, the few hundred dollars to form an LLC is worth it. The liability protection isn't theoretical — it's a real legal firewall that a sole proprietorship simply doesn't offer.

There's nothing wrong with starting as a sole prop. Many successful businesses begin that way. The key is to treat it as a deliberate starting point rather than a default you stumbled into. Know what it is, know what it isn't, and have a plan for when forming an LLC makes sense. For most solopreneurs, that moment comes somewhere around your first $20,000 in annual revenue — or the moment you sign your first significant client contract.

Operating under a name that's not your own? Read our guide on How to Register a DBA to make it official.

Many sole proprietors eventually outgrow the structure: compare it against other business structures, register a DBA if you'll operate under a brand name, and get ahead of quarterly estimated taxes.