Building Your Business What Is Sole Proprietorship? Sole Proprietorship Explained in Less Than 5 Minutes By Halley Bondy Halley Bondy Website Halley Bondy is a freelance journalist covering personal finance and a variety of small business topics for The Balance and outlets including NBC Know Your Value and Business Insider. She is an expert in startups, entrepreneurship, business financing, the U.S. economy, and investing. You can find her articles in NBC News, Business Insider, Lifewire News, Daily Beast, DAME Magazine, Eater NY, Bustle, Romper, The Outline, Oxygen, CMT, Vice, New York Daily News, MTV, and more learn about our editorial policies Updated on December 31, 2021 02:14PM EST Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by Emily Ernsberger In This Article View All In This Article Definition and Examples of Sole Proprietorship How Sole Proprietorship Works Alternatives to a Sole Proprietorship How Much Does a Sole Proprietorship Cost? Photo: Johner Images / Getty Images Definition Sole proprietorship is the simplest and most common way for individuals to start a business. It is an unincorporated status in which a business is viewed as one and the same with its owner. Definition and Examples of Sole Proprietorship The term sole proprietorship is used to determine a business owner’s taxation and liability. Because the process is structurally simple and inexpensive, sole proprietorship is the most common path individuals take when starting a business. As far as taxes are concerned, there is no distinction between the business and the individual owner in a sole proprietorship. The owner is entitled to all business profits and is also personally responsible for all debts, losses, and other liabilities. Unlike a limited liability company (LLC) or an S-Corporation, sole proprietors are considered unincorporated. Note Typically, a sole proprietorship is run by one owner, although in some circumstances, both spouses can apply to be sole proprietors of the same business. A sole proprietor can exist in a variety of industries. A few common examples include: A freelance graphic designer is considered a sole proprietor of their business.If a teacher runs a tutoring business on the side, the tutoring would be considered a sole proprietorship.A small landscaping businessIndependent sales consultant Personal trainerPhotographer How Sole Proprietorship Works There is no formal process required to become a sole proprietor. A person who owns their own business automatically receives the title by default, and there is no cost associated with the designation. If you are running an independent business, you may already have a sole proprietorship without knowing it. In a sole proprietorship, the owner’s taxes and the business’ taxes are considered one and the same—they do not need to be filed separately. This makes sole proprietorship taxes relatively simple compared to taxes for other incorporated structures. Note Of all business structures, tax rates are considered the lowest under sole proprietorship, according to the Small Business Administration (SBA). Sole proprietors can hire employees, whether they’re full-time or independent contractors. During tax time, a sole proprietor must fill out Form 1040 for their income, estimated, and self-employment taxes. If they hire employees, they must pay standard labor taxes, including federal unemployment and Medicare. A sole proprietor maintains total control over all business decisions without having to consult shareholders. This means they have complete access to the business’ profits, but they also incur all of the liability associated with running the business. Note If a sole proprietor cannot personally cover their own debts out of pocket, a claimant may be able to gain access to the proprietor’s personal accounts, assets, and property. If an employee is injured on the job while working for a sole-proprietor landscaping company, for example, the employee could theoretically sue the owner for all of their personal assets, according to April Walker, lead manager for Tax Practice & Ethics at the American Institute of CPAs. Or, if a sole proprietor defaults on their loans, a bank could seize the owner’s property. Under incorporated structures such as LLCs, on the other hand, claimants may only access the business’ assets. Alternatives to a Sole Proprietorship For those hoping to grow their business beyond a sole proprietorship, the most common alternatives are: Single-Member Limited Liability Corporations: This status allows business owners to file their business and individual taxes jointly while incurring little personal liability. Annual fees apply and they vary by state. Limited Liability Companies (LLCs): For businesses looking to grow and include more owners, LLCs are a common option. Owners must pay fees for this incorporated status, and they require separate taxes for businesses and owners. S-Corporations: For small businesses with multiple owners, this incorporated status may allow for a tax break on Social Security and Medicare tax, making it an attractive option for proprietors with employees, according to Walker. How Much Does a Sole Proprietorship Cost? There is no fee specifically associated with the sole proprietorship designation. However, sole proprietors must pay for their requisite licensing and permit fees, as all businesses need to. Remember that licensing and permit fees vary by industry and state. Use the SBA’s Licensing & Permits tool to identify federal, state, and local permits, as well as licenses and registrations you may need to run a business. Key Takeaways A sole proprietorship is considered the simplest, cheapest business structure for independent owners.Sole proprietors have complete control over their business entity, including profits, but they are also personally responsible for debts, losses, expenses, and liabilities. Alternatives to sole proprietorship include single-member limited liability corporations, LLCs, and S-corporations. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Small Business Administration. "Sole Proprietorship." Accessed Aug. 28, 2021. Small Business Administration. "Effective Federal Income Tax Rates Faced By Small Businesses in the United States," Page 3. Accessed Aug. 28, 2021. Small Business Administration. "Tax Planning and Reporting for a Small Business," Page 7. Accessed Aug. 28, 2021. Small Business Administration. "Business Structures - Limited Liability." Accessed Aug. 28, 2021. Small Business Administration. "Choose a Business Structure." Accessed Aug. 28, 2021.