What Is Sole Proprietorship?

A sole proprietorship is the default structure for any individual doing business without forming a separate legal entity. All business income and losses are reported on Schedule C of the owner's personal tax return — there is no separate business tax filing. The simplicity comes at a cost: the owner has unlimited personal liability, meaning creditors can pursue personal assets (savings, home, car) to satisfy business debts or judgments. Unlike an LLC or corporation, a sole proprietorship offers no legal shield between you and your business. There is no state filing required to operate as a sole proprietor, though you may need a DBA (Doing Business As) registration if operating under a name other than your own. Sole proprietors must pay self-employment taxes (15.3%) on net earnings.

Many freelancers and early-stage business owners operate as sole proprietors without realizing the liability exposure. Converting to an LLC is typically inexpensive and provides important protection. A business attorney or tax advisor can help you determine when the liability risk and tax implications make a formal entity structure worth establishing.