What Is a Sole Proprietorship?
A sole proprietorship is the simplest kind of business: one person owns and runs it, and there is no legal separation between the owner and the business. If you sell products or services under your own name, or under a trade name, and you have not formed a company, you are usually a sole proprietor.
How it works
You do not need to file formation papers to become a sole proprietor in many places, though you may need a business license, a trade name registration or a tax registration depending on where you live. Income from the business is reported on your own tax return, and you usually pay self-employment tax in the United States.
The main risk
The US Small Business Administration notes that a sole proprietor can be held personally liable for the debts and obligations of the business. That means a business debt or a successful claim can reach your personal assets. Insurance and careful contracts can reduce the risk, but the structure itself offers no protection.
When it fits
A sole proprietorship suits a small test with little risk, such as a few digital products or a service you deliver yourself. When risk, partners or income grow, many people form an LLC.
An example
A student who tutors online under their own name and takes payments personally is a sole proprietor. They report the income on their tax return and keep records, but have no separate company.
Related terms
See limited liability company, DBA and EIN. For a comparison, read our page on sole proprietorship vs LLC in the US.
Frequently asked questions
Do I need to register a sole proprietorship?
Often not as a company, but you may need tax registration, a license or a trade name filing. Rules vary by country and place.
Does a sole proprietor pay tax?
Yes. Business income is reported on the owner's personal return, and self-employment tax may apply.
Can I switch to an LLC later?
Yes. Many people start as sole proprietors and form an LLC when risk or income grows. Check tax and contract consequences first.