What is a Sole Proprietorship? The Ultimate Guide for New Business Owners

There’s a good chance something like this has happened to you. You’re out for a walk on a warm, summer day. You’re feeling a bit thirsty. As you turn the corner, you come across a lemonade stand. You pull some change out of your pocket and walk away happy and refreshed.

You’ve just done business with a sole proprietorship.

While the dream you have for your business may be grander than a neighborhood refreshment stand, a sole proprietor business structure may be well-suited for getting you up and running quickly and easily.

What Is a Sole Proprietorship?

A sole proprietorship is the simplest and typically the most common structure people choose when they start a business. More specifically, it’s a business owned and run by one person (although you may have employees). As a sole proprietor, you’re entitled to all the profits. At the same time, you’re also responsible for all the debts, losses, and liabilities of the business.

Sole proprietorships are very popular. There are more of them in the U.S. than any other type of business. Not counting the lemonade stand around the corner, there are around 22.3 million sole proprietorships in the U.S.

Given the broad definition above of a sole proprietorship as a one-person operation, it may be easy to imagine all of them as small storefronts on Main Street or at-home startups being run out of a basement or garage.

That’s not always the case.

Coca-Cola.

While many sole proprietorships may start small like that, they don’t necessarily stay that way. In 1888, Asa Candler, a Georgia druggist, used a beverage recipe he bought to become the sole proprietor of Coca-Cola, and likely fueled the dreams of countless lemonade stand owners.

Annie’s.

Annie Withey, the founder of Annie’s Homegrown, started her business as a sole proprietorship to sell organic pasta, meals, and snacks. She maintained a sole proprietorship structure for most of the company’s first decade. It gave her the flexibility and nimbleness to create and take new products to market quickly — one of the key advantages of a sole proprietorship.

Kinko’s.

Many sole proprietors and other types of business owners have likely found themselves in a Kinko’s. Like Coca-Cola and Annie’s, this company started as a sole proprietorship. It continued that way throughout much of its growth and the eventual sale to a private investment firm.

Different Types of Sole Proprietorships

Whether you want to start a business to walk dogs, build houses, sell cajun accordions, or even write about any of those occupations, a sole proprietorship can work for just about any dream you have. Here are three basic categories of sole proprietors.

1. Self-employed business owner.

This is a typical type of sole proprietorship. You’re usually selling a product or providing a service. There is generally no contractual agreement between you and your customers. You’re simply offering something for sale. The lemonade stand is a classic example.

Along with retail sales to the public, other examples may include trades such as painting, landscaping, and handyman businesses. You also could buy and sell merchandise online as a self-employed business owner.

2. Independent contractor.

This is generally someone with a professional skill or training, such as an accountant or graphic designer, for example. While you’re in business for yourself, your role is often more like an employee. Independent contractors are hired by an employer, but they usually do not receive typical benefits nor have taxes withheld.

Depending on the work, you may charge your client an hourly rate or a per-project fee.

3. Franchise operator.

With a franchise, you can be in business for yourself, but you’re expanding on a business idea someone else has created. As a franchisee, you’re a sole proprietor who is using a successful business model provided by the franchisor.

A franchise can provide a “head start,” especially if you don’t have a lot of business experience. Much of the ”how to” of the business has been taken care of. You just need to follow the plan and business model. In return, you typically pay a fee and a percentage of the sales to the franchisor depending on the agreement and terms.

What You Need to Know About Taxes as a Sole Proprietorship

Starting and running a business as a sole proprietor can take a lot of your time and effort. That includes taking care of a list of items that aren’t directly related to what you do, such as taxes.

A sole proprietorship can potentially make dealing with income taxes easier and less time-consuming than some other business entities.

Generally, only the profit from your business is taxable, and it can be included as part of your personal tax return, and taxed at your personal tax rate. While you will have to pay the full self-employment taxes (Medicare and Social Security), these can also typically be included on your personal income tax return.

One more thing, as a sole proprietor, you will likely be able to deduct the cost of health insurance for you, your spouse, and any dependents. However, you should consult an accountant or tax professional regarding what’s necessary for your particular business and financial situation.

How to Set Up a Sole Proprietorship

1. Check out any local requirements.

Depending on what you do, you may need certain licenses, permits, or other approvals and certifications to get started. We have some information about business licenses here that can help.

However, unlike other forms of businesses, in most cases you typically won't have to register or formally declare that you’re in business, which can save you time and money right off the bat.

2. Choose a name.

Legally, there is no difference between you and your sole proprietorship. That’s often true in the eyes of the public, as well. That’s one reason why many sole proprietors operate under their own name (like “Neddy’s Lemonade” that I ran for one hot day as a kid in front of my parents’ house).

If you do want to give your business its own name, it can be as easy as registering it with your state and local governments. As a sole proprietor, you may have to register for a “fictitious business name,” or DBA (doing business as) depending on the specific requirements where you’re located.

When it comes to naming, it also can make sense to register a domain name, especially if you have a DBA. This not only secures the name for when you’re ready to launch your website or other online presence — it typically prevents someone else from laying claim to it.

3. Get an EIN and open a business bank account.

Something else to consider is getting an EIN (employer identification number) from the IRS. This will make tax reporting easier and is helpful if you decide to bring on any employees or independent contractors.

While you can legally use your personal bank account for business payments and deposits, it’s a good idea to consider opening a business bank account.

Among the benefits of a business bank account are enabling you to accept credit card payments, making tax reporting easier for you and your accountant, and helping build a credit history for your business.

4. Safeguard your dream.

It was a sad day when Neddy’s Lemonade stand had to close because my dad needed the folding table I was using for one of his projects. It goes to show you that no matter what type of business you have, there are many risks out there.

Those risks can be significant, especially for sole proprietors. As we mentioned above, a sole proprietor is personally responsible for all of the business’s debts and any claims against it.

Not only could you lose your business and all its assets, you could lose all your personal assets, like your home, as well.

Protect a lifetime of hard work in just 10 minutes.

While liability can be a heavy burden for a business owner, having the right sole proprietorship insurance can help lighten the load.

At Simply Business, we work with many sole proprietors in a wide variety of businesses and trades. We can often find general liability policies starting as low as $21.25/month.*

We love to make business insurance fast, easy, and affordable, so you can get back to making your business thrive.

Now you know how to set up a sole proprietorship, but is a sole proprietorship right for you? We’ve got that covered in the next section.

Signs You Should Register as a Sole Proprietorship

1. You want to see if your business idea will work.

Everyone says you take great photographs. You can fix just about anything around the house. You often have better design ideas than the people on the home improvement shows. Maybe you should start your own business? A great way to tell is to start a business.

Doing so as a sole proprietor can be as simple as just starting work. As a sole proprietor, you avoid many of the costs and fees needed to start with other types of business structures. It can be a quick, low-commitment, and relatively inexpensive way to see if your business can succeed.

2. You’re comfortable with the risks.

As we mentioned above, it’s not just your pride on the line. Risk-taking on its own can be dangerous. However, taking the right risks for the right reasons can pay off nicely. Just ask Asa Candler or Annie Withey.

Generally speaking, if your liability risk is low, it can be worth looking at a sole proprietorship — especially considering how easy it is to get started and that you will keep all the profits.

3. You want to dream big and you’re willing to start small.

Consider this. One of the main reasons new businesses fail is growing too fast and not being able to handle it.

For instance, what if a whole lot of people want you to photograph their events, or build their decks, or redesign their kitchens? How much can you handle at the start and still have time to take care of billing, inventory, and a website?

Being able to start small can help you find ways to work smarter. It also can keep expenses low and save more of your profits to invest in the people and equipment you’ll need to grow your business.

4. You have a small customer base.

You know how good your idea is, or how well you can do something. But outside your circle of friends and family, not too many other people do.

Not to worry. As a sole proprietor, you can begin by selling to friends and family and getting referrals from them. It’s a good way to see how well you can expand your business while minimizing financial risk.

Let’s Open for Business

Ready to be the next Asa Chandler or Annie Withey? If so, that’s great. But before you throw open the doors, add custom lettering and graphics to your vehicle, or show up with a website on the internet, it’s a good idea to have a plan.

Business plans.

Business plans can vary about as much as businesses do. We work with a lot of small businesses. Many of them are, or started as, sole proprietors.

Our customers have helped us better understand what matters most for them. We’ve used a lot of that insight to create our free business plan template, tailored for business people who are just getting started to customize for their business.

Think of a business plan like a roadmap. When you’re starting out, it can show you the best way to reach your destination. Then if the route you planned isn’t getting you where you want to be, a business plan — like a map — can help keep you from getting lost.

One last point. Regardless of your starting off as a sole proprietorship, it doesn’t necessarily mean your business is locked into that structure. As you grow, you may want to consider other business structures that might work better for you, such as an LLC (limited liability company) or an incorporated business.

Having a good business plan in place can make that transition smoother. So can knowing where to turn when questions and challenges pop up (which they likely will). You’ll find a wealth of information for sole proprietors at the Small Business Administration, as well as right here at Simply Business.

*Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on July-September 2023 data of 10% of our total policies sold.