“What Is a Sole Proprietorship? It’s one of the simplest ways to start a business — no complex paperwork, no partners, and no corporate formalities, just you running your venture under your own name or a trade name.”
Introduction For What Is a Sole Proprietorship?
A sole proprietorship is the most straightforward and common business structure, where a single individual owns and operates an unincorporated business. Unlike corporations or LLCs, there is no legal separation between the business and the owner—meaning the owner is personally responsible for all profits, debts, and legal liabilities.
This business model is popular among freelancers, independent contractors, consultants, and small business owners due to its ease of setup, minimal regulatory requirements, and tax simplicity. However, it also comes with risks, such as unlimited personal liability.
In this 2025 guide, we’ll explore:
- The definition and legal structure of a sole proprietorship
- Key advantages and disadvantages
- Tax obligations and filing requirements
- Steps to start a sole proprietorship
- How it compares to LLCs and corporations
What Is a Sole Proprietorship? (Definition & Legal Structure)
A sole proprietorship is the simplest and most common way to run a business. In this setup, one person owns and manages everything — there are no partners, no shareholders, and no legal separation between you and your business. In the eyes of the law, you are the business. That means you get to keep all the profits, but you’re also personally responsible for any debts, lawsuits, or obligations.
This business structure is popular because it’s straightforward, inexpensive, and easy to start. There’s no need to file complex paperwork or hold annual meetings like corporations do, which makes it a favorite choice for freelancers, gig workers, and small business owners in 2025.
Key Features You Should Know
Single ownership is the defining feature — you’re in complete control. Every decision, from pricing to branding, is yours to make. But this also means no liability protection; if your business owes money, creditors can come after your personal assets like your home or savings.
From a tax standpoint, sole proprietorships are simple to handle. You don’t file separate business taxes. Instead, you report your income and expenses on your personal tax return using Form 1040 and Schedule C. This is called pass-through taxation, and it keeps things relatively straightforward compared to corporate taxes.
Another big advantage is that there’s minimal government involvement. Unless you’re using a trade name (also called a DBA), you don’t have to register with the state. There are no mandatory annual reports or board meetings — once you decide to start, you can begin operating almost immediately.
How Sole Proprietorships Work in 2025
By default, if you don’t file a DBA, your business name will simply be your own name. For example, if Jane Doe starts baking cakes and selling them, her business is just “Jane Doe.” But if she wants a brand name like “Doe’s Bakery,” she can register a DBA with her local or state government.
While you don’t have to get a separate Employer Identification Number (EIN), it’s a good idea if you want to avoid using your Social Security Number on business documents or if you plan to hire employees. Getting an EIN is free and can make things smoother when opening business bank accounts or working with vendors.
Who Should Consider a Sole Proprietorship?
If you’re a freelancer, independent contractor, or small business owner starting out with low startup costs and low risk, a sole proprietorship might be perfect for you. Writers, designers, consultants, online sellers, tutors, and personal trainers often use this structure because it’s easy to manage and inexpensive to maintain.
When Should You Consider an LLC Instead?
A sole proprietorship might not be the best fit if your business involves high liability or significant debt, such as construction, healthcare, or manufacturing. In those cases, forming an LLC can protect your personal assets. An LLC also makes sense if you plan to seek investors or apply for larger business loans, since it offers more credibility and legal protection.
Advantages & Disadvantages of a Sole Proprietorship
A sole proprietorship is widely considered the easiest and fastest type of business to start. In most cases, there is no formal registration required unless you plan to operate under a trade name (DBA). Once you’ve obtained any necessary local licenses or permits, you can begin operations immediately without filing formation documents with the state.
One of the biggest benefits of this structure is complete control and flexibility. As the sole owner, you make every business decision yourself — no partners, no board meetings, and no shareholder approvals are needed. This freedom allows you to quickly respond to market changes or adjust your services without going through lengthy approval processes.
Taxes are also relatively simple. A sole proprietorship doesn’t file a separate business tax return; instead, income and expenses are reported directly on your personal tax return using Schedule C (Form 1040). In addition, many sole proprietors qualify for the Qualified Business Income (QBI) deduction, which allows you to deduct up to 20% of your net business income, reducing your taxable income even further.
Compliance is minimal compared to other business structures. There are no annual reports, corporate meetings, or shareholder requirements to worry about. Record-keeping is straightforward, and you won’t have to deal with the complex legal formalities that corporations must follow.
Finally, all profits go directly to you as the owner. Unlike corporations that must distribute profits to shareholders, a sole proprietor has direct access to earnings and can withdraw money at any time. This makes managing cash flow simple and keeps business finances straightforward.
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Disadvantages of a Sole Proprietorship
Despite its simplicity, a sole proprietorship has significant drawbacks. The most serious is unlimited personal liability. Since there is no legal separation between you and your business, you are personally responsible for all business debts, lawsuits, and obligations. If the business cannot pay its debts, creditors can pursue your personal assets — including your home, car, and savings — to cover the shortfall.
Raising capital can also be challenging. Banks and investors are often hesitant to fund sole proprietorships because there is no formal legal structure and no shares or equity to offer in exchange for investment. This limited access to financing can make it difficult to scale or expand beyond a small operation.
Another downside is higher self-employment taxes. As a sole proprietor, you must pay the full 15.3% self-employment tax, which covers Social Security and Medicare contributions. Employees split this tax with their employers, but sole proprietors must pay the entire amount themselves, often resulting in a higher tax burden compared to corporate shareholders.
Growth potential is also limited. Without formal benefits, stock options, or legal protections, it can be harder to attract top talent or large clients. The credibility of a sole proprietorship may be perceived as lower compared to incorporated entities, and scaling operations beyond a certain point can be difficult.
Lastly, a sole proprietorship ends when the owner stops operating. If you retire, become incapacitated, or pass away, the business typically ceases to exist. There is no separate legal identity to transfer, making it harder to sell the business as an ongoing entity.
Taxation for Sole Proprietorships
How Sole Proprietors Pay Taxes in 2025
Sole proprietors pay taxes differently than corporations or partnerships because their business income is considered personal income. All profits (or losses) from the business are reported on the owner’s personal tax return, Form 1040, using Schedule C (Profit or Loss from Business). There’s no separate business tax return — everything flows through to the owner’s personal income taxes.
However, sole proprietors must also pay self-employment tax, which is 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare). Half of this amount is deductible on your personal tax return. If you expect to owe $1,000 or more in taxes for the year, you’re required to make quarterly estimated tax payments using Form 1040-ES in April, June, September, and January.
2025 Tax Rates and Key Brackets
Federal income tax rates for 2025 range from 10% to 37%, depending on your total taxable income — which includes your business profits plus any other income you earn. In addition to federal tax, most states impose their own income tax, which varies by location. For example, California offers a 9.3% elective pass-through entity tax for sole proprietors and similar businesses.
Sole proprietors may also qualify for the Qualified Business Income (QBI) deduction, which allows up to a 20% deduction on eligible business income. For 2025, the deduction phases out above $197,300 for single filers and $383,900 for married couples filing jointly.
Important Tax Forms
Several IRS forms are essential for sole proprietors:
- Schedule C is used to report business income and expenses.
- Schedule SE calculates self-employment tax.
- Form 1040-ES is used to make quarterly estimated tax payments.
- Form 1099-NEC must be issued if you pay independent contractors $600 or more during the year.
Keeping track of these forms ensures accurate filing and helps avoid IRS penalties.
Tax Deductions to Reduce Liability
Sole proprietors can reduce taxable income by claiming business-related deductions. The home office deduction allows $5 per square foot (up to 300 sq. ft.) or actual expenses. The mileage deduction for 2025 is 67 cents per mile, useful for those who drive for business purposes. Health insurance premiums are deductible for self-employed individuals, and contributions to retirement plans like a SEP IRA (up to $71,000 in 2025) or Solo 401(k) can provide significant savings. For equipment purchases, Section 179 allows expensing up to $1.25 million of qualifying assets.
Recent Tax Changes for 2025
A few updates affect sole proprietors this year. Bonus depreciation for equipment purchases has decreased to 40%, down from 60% in 2024, meaning fewer upfront write-offs. The IRS has delayed the 1099-K reporting threshold for third-party payment platforms to $5,000 (up from $600), reducing reporting for small sellers. Meal deductions have reverted to 50% after being temporarily 100% during prior pandemic relief years.
Compliance and Record-Keeping Tips
To simplify taxes and avoid mistakes, it’s best to separate personal and business finances by maintaining a dedicated business bank account. Keep detailed records, including receipts, mileage logs, and documentation for home office expenses. Also, check your state and local requirements — some areas impose sales taxes, local business licenses, or even franchise taxes on sole proprietors.
How to Start a Sole Proprietorship
Sole proprietors pay taxes differently than corporations or partnerships because their business income is considered personal income. All profits (or losses) from the business are reported on the owner’s personal tax return, Form 1040, using Schedule C (Profit or Loss from Business). There’s no separate business tax return — everything flows through to the owner’s personal income taxes.
However, sole proprietors must also pay self-employment tax, which is 15.3% of net earnings (12.4% for Social Security and 2.9% for Medicare). Half of this amount is deductible on your personal tax return. If you expect to owe $1,000 or more in taxes for the year, you’re required to make quarterly estimated tax payments using Form 1040-ES in April, June, September, and January.
2025 Tax Rates and Key Brackets
Federal income tax rates for 2025 range from 10% to 37%, depending on your total taxable income — which includes your business profits plus any other income you earn. In addition to federal tax, most states impose their own income tax, which varies by location. For example, California offers a 9.3% elective pass-through entity tax for sole proprietors and similar businesses.
Sole proprietors may also qualify for the Qualified Business Income (QBI) deduction, which allows up to a 20% deduction on eligible business income. For 2025, the deduction phases out above $197,300 for single filers and $383,900 for married couples filing jointly.
Important Tax Forms
Several IRS forms are essential for sole proprietors:
- Schedule C is used to report business income and expenses.
- Schedule SE calculates self-employment tax.
- Form 1040-ES is used to make quarterly estimated tax payments.
- Form 1099-NEC must be issued if you pay independent contractors $600 or more during the year.
Keeping track of these forms ensures accurate filing and helps avoid IRS penalties.
Tax Deductions to Reduce Liability
Sole proprietors can reduce taxable income by claiming business-related deductions. The home office deduction allows $5 per square foot (up to 300 sq. ft.) or actual expenses. The mileage deduction for 2025 is 67 cents per mile, useful for those who drive for business purposes. Health insurance premiums are deductible for self-employed individuals, and contributions to retirement plans like a SEP IRA (up to $71,000 in 2025) or Solo 401(k) can provide significant savings. For equipment purchases, Section 179 allows expensing up to $1.25 million of qualifying assets.
Recent Tax Changes for 2025
A few updates affect sole proprietors this year. Bonus depreciation for equipment purchases has decreased to 40%, down from 60% in 2024, meaning fewer upfront write-offs. The IRS has delayed the 1099-K reporting threshold for third-party payment platforms to $5,000 (up from $600), reducing reporting for small sellers. Meal deductions have reverted to 50% after being temporarily 100% during prior pandemic relief years.
Compliance and Record-Keeping Tips
To simplify taxes and avoid mistakes, it’s best to separate personal and business finances by maintaining a dedicated business bank account. Keep detailed records, including receipts, mileage logs, and documentation for home office expenses. Also, check your state and local requirements — some areas impose sales taxes, local business licenses, or even franchise taxes on sole proprietors.
Sole Proprietorship vs. LLC vs. Corporation
Choosing between a sole proprietorship, LLC, or corporation depends on your liability needs, tax goals, and growth plans. Sole props offer simplicity but no liability protection, LLCs balance flexibility with asset protection, while corporations suit high-growth businesses with complex needs. Each structure has distinct legal, tax, and compliance implications for 2025.
Here’s a comprehensive comparison of Sole Proprietorship vs. LLC vs. Corporation in 2025, covering key differences in liability, taxation, setup, and suitability for different business needs:
1. Legal Structure & Liability Protection
| Sole Proprietorship | LLC | Corporation |
| No legal separation from owner. Unlimited personal liability (creditors can seize personal assets). | Separate legal entity. Limited liability (personal assets protected from business debts). | Separate legal entity. Strong liability protection (shareholders are not personally liable). |
| Only 1 owner allowed. | 1+ owners (single/multi-member). | Unlimited shareholders (can issue stock). |
2. Taxation
| Sole Proprietorship | LLC | Corporation |
| Pass-through taxation: Profits taxed on owner’s personal return (Schedule C). Pays 15.3% self-employment tax. | Default: Pass-through (like sole prop). Can elect S-Corp or C-Corp taxation to reduce self-employment taxes. | C-Corp: Double taxation (corporate tax + shareholder dividends tax). S-Corp: Pass-through taxation (no corporate tax). |
| No separate business tax return. | Single-member LLCs file Schedule C; multi-member LLCs file Form 1065. | C-Corps file Form 1120; S-Corps file Form 1120S. |
3. Setup & Compliance
| Sole Proprietorship | LLC | Corporation |
| Easiest to start: No state registration (unless using a DBA). | Moderate complexity: File Articles of Organization, pay state fees ($50–$500), and draft an operating agreement. | Most complex: File Articles of Incorporation, appoint directors, hold annual meetings, and issue stock. |
| No annual reports or fees. | Annual/biennial reports and fees required (varies by state). | Strict compliance: Annual reports, shareholder meetings, and corporate minutes. |
4. Funding & Growth Potential
| Sole Proprietorship | LLC | Corporation |
| Hard to raise capital: No investors; loans are personal. | Easier financing: Can add members or attract investors (though no stock issuance). | Best for scaling: Can issue stock, go public, and attract venture capital. |
| Limited to owner’s resources. | Flexible profit-sharing via operating agreement. | Dividends based on stock ownership. |
Sole Proprietorship: Freelancers, solopreneurs, or low-risk side hustles with minimal startup costs.
- LLC: Small to mid-sized businesses wanting liability protection without corporate complexity (e.g., consultants, real estate investors).
- Corporation: High-growth startups, businesses seeking investors, or those planning to go public.
Key Considerations for 2025
- LLC Flexibility: Single-member LLCs can elect S-Corp status to reduce self-employment taxes (if profits exceed $50K).
- QBI Deduction: Sole props and LLCs may qualify for a 20% deduction on qualified business income (set to expire after 2025).
- State Variations: LLCs in California pay an $800 annual franchise tax; corporations face state-specific fees.
When to Convert to an LLC or Corporation?
Consider converting to an LLC when you need liability protection or tax flexibility, or to a corporation if seeking investors or planning to go public. The right time depends on your business risks, growth goals, and profit levels
When Should You Convert a Sole Proprietorship to an LLC?
Converting your sole proprietorship to a Limited Liability Company (LLC) is a smart move if your business is starting to grow or involves any significant legal or financial risks. As a sole proprietor, your personal assets — like your home, savings, or car — are exposed if your business faces lawsuits or debt. An LLC separates your personal and business liabilities, giving you the protection you don’t get as a sole proprietor.
Another big reason to switch is tax flexibility. By default, LLCs are taxed like sole proprietorships (pass-through taxation), but you can also elect S-Corporation status. This option can help you save on self-employment taxes by paying yourself a reasonable salary and taking additional profits as dividends, which aren’t subject to the 15.3% self-employment tax — especially beneficial if your profits are over $50,000 a year.
LLCs are also ideal if you’re bringing in partners or investors. You can set up an operating agreement that outlines each member’s ownership and profit-sharing terms, giving you flexibility that sole proprietorships lack. And as your business expands, operating as an LLC can boost your credibility with banks, vendors, and potential clients.
Convert to a Corporation (C-Corp or S-Corp) If:
Forming a corporation — either a C-Corp or an S-Corp — makes sense if you have bigger growth plans. Corporations are better suited for businesses looking to raise significant capital, since they can issue stock to attract investors and venture capital funding. Most venture capitalists, for example, prefer C-Corps because of the way stock ownership is structured.
If you’re looking for tax advantages, particularly reducing self-employment taxes, an S-Corp can be attractive. Like an LLC taxed as an S-Corp, you can pay yourself a salary (subject to payroll taxes) and take additional profits as dividends, which avoids the 15.3% self-employment tax.
Corporations also offer strong credibility for scaling nationally or globally, which can be helpful for securing large contracts or entering into franchise opportunities. Finally, if you anticipate selling your business or going public in the future, a C-Corp structure is the standard for IPOs and acquisitions.
Conclusion
The decision to operate as a sole proprietorship, LLC, or corporation depends on your business’s unique needs, risk factors, and growth ambitions. Sole proprietorships offer simplicity and are ideal for low-risk ventures, but they lack liability protection and scalability. LLCs provide a balanced middle ground with asset protection and tax flexibility, making them suitable for growing small businesses. Corporations, while more complex, are the best choice for high-growth companies seeking investment opportunities or planning to go public. As you evaluate these options, consider your long-term goals, industry risks, and financial situation—consulting with a legal or tax professional can help ensure you make the most strategic choice for your business’s future.