Sole Proprietorship Definition
A sole proprietorship is considered one of the easiest types of businesses to start. Unlike corporations or LLC’s, you don’t have to register with the state. However, you must acquire appropriate permits and licenses to operate legally, and you are personally liable for debts, lawsuits, or taxes your company accrues.
It’s common knowledge that over 70% of U.S. businesses are owned and operated by sole proprietors or sole traders. Many entrepreneurs love sole proprietorships because of the ownership they have over business decisions and revenue and how easy and cost-effective they are to set up.
So, what’s the low-down on sole proprietorships, and how do you start one? I’ve got an easy guide for you below. Before you start a business, however, it’s important to have a business plan. Here’s an easy-to-use business plan template to begin.
Now that you have the tools to create a business plan, let’s go over the definition of a sole proprietor and the types of sole proprietorships one would typically launch.
What's a Sole Proprietor?
A sole proprietor has complete control over the revenue and operations of their business. However, the sole proprietor is also personally responsible for all debts, lawsuits, and taxes their company accrues. So, if their business is sued, personal assets like their home, credit score, and savings are unprotected.
Types of Sole Proprietorships
A sole proprietor may operate as an independent contractor (a freelancer), a business owner, or a franchisee.
- Independent Contractor: An independent contractor is a self-employed sole proprietor who takes on projects on a contract basis with clients. They have the freedom to choose which clients they take on, but they are often
subject to the processes and methods that the client requires.
- Business Owner: Business owners can also be self-employed sole proprietors, but unlike the contractor, there is much more autonomy in how the work is completed for clients, and the operation itself may even be more complex with employees and/or intellectual property.
- Franchisee: Franchise owners may also be sole proprietors. The franchisee benefits from the guidance, brand, business model, etc. in exchange for royalties paid to the franchisor.
Free Business Plan Template
Fill out the form to get your free template.
Sole Proprietorship Business Examples
Before starting a sole proprietorship, you should first choose the kind of business you’ll found.
Because they’re free and easy to start, sole proprietorships are a great choice for people who want to turn their side hustles into something a little more serious — and lucrative. A variety of businesses are operated as sole proprietorships.
Here are some common examples of sole proprietorships:
1. Web Developer
2. Digital Marketer
Digital marketers do anything from managing a brand’s social media accounts to improving a brand’s SEO. Be sure to specialize rather than offering all marketing services.
3. Virtual Assistant
Business owners are busy — but they don’t want to hire an office assistant, especially because most tasks can be done online. Enter the virtual assistant. As a sole proprietor running a virtual assistant business, you’d handle tasks such as bookkeeping and database entering for other business owners.
4. Daycare Operator
Daycare operators run small, affordable daycare facilities for parents who can’t afford expensive day schools or a dedicated nanny. A background education would be helpful before creating a daycare business. You could, alternatively, found a dog daycare, or a daycare for the elderly.
5. Freelance Graphic Designer
Graphic designers create all the beautiful things: landing pages, brochures, flyers, and social media ads. As in with digital marketing, you should specialize in either digital or print graphic design, and target certain industries that interest you. Creating a banner for a hair salon would be much different than creating one for an engineering firm. You’ll need a graphic design portfolio.
6. IT Consultant or Computer/IT Specialist
Have you ever run into IT problems? So do countless businesses. As an IT consultant running your own business, you would offer IT troubleshooting services to other companies, resolving issues with both the company’s hardware and software solutions. Be open to traveling for this type of sole proprietor business.
7. Freelance Writer
As a freelance writer with a sole proprietorship, you would target brands that need content written for them. These may include non-fiction articles, news articles, blog posts, website pages, and social media ads. As with digital marketing and graphic design, consider specializing in one writing form.
8. Freelance Copyeditor
Freelance copyeditors edit someone else’s writing for clarity, concision, and effectiveness. They can proofread someone else’s work for minor errors and typos, but will focus more on flow and cohesion of ideas.
You can either go into fiction or nonfiction copyediting. Alternatively, you can become a copyeditor specifically for websites and blogs.
9. Fitness Coach
Fitness coaching is a great choice if you have a passion for fitness. This type of sole proprietor typically targets gym goers — or those who’d like to start — to help them reach their fitness goals through a customized program. A degree in exercise science would be beneficial, as well as a certification in fitness coaching.
Housekeepers clean houses with more thoroughness than a busy homeowner would. Tasks include mopping, sweeping, taking out the trash, washing dishes, and doing laundry. For optimal success as a sole proprietor, you should target a small geographical area to pitch your housekeeping services.
Landscapers mow lawns, trim bushes, check the soil’s health, and do everything related to backyard and front yard maintenance. You can offer something simple, such as lawn mowing, and slowly add more services as you gain more advanced landcare knowledge.
Like cooking? Then a catering sole proprietorship may be for you. Caterers cook large amounts of food for other people’s events and typically take care of delivery and setup. Instagram is a great platform to spread the word about your business.
An alternative sole proprietorship for those who enjoy cooking would be a baking business. You can either specialize in sweets or savory goods, or offer a mixture of both. While we often associate bakers with brick-and-mortar bakeries, you can operate this business out of your home and arrange local pickups.
As a freelance accountant, you would work with small business owners and audit their inflow and outflow of cash. Be sure to be proficient in at least one accounting software, such as QuickBooks or FreshBooks.
15. Freelance Non-Fiction Book Editor
Non-fiction book editors typically review highly technical or specialized material for flow, accuracy, and logic. These editors are different from other types because they exclusively specialize in manuscript-length works and have an advanced degree in the topic they specialize in.
16. Tax Preparer
Tax preparers target individuals who find tax return documents inaccessible and difficult to fill out (been there). This is one of the easiest sole proprietorships to launch, as there are no education requirements. A course in tax preparation is all you need.
17. Document Assistant
Document assistance is in a similar vein to tax preparation. You would help individuals fill out highly complicated forms — such as immigration applications, visa applications, and unemployment claims — and potentially submit them on your client’s behalf. A proficiency in another language would be beneficial, as those who need assistance are typically non-English speakers.
18. Resume and Cover Letter Writer
Resume and cover letter writers serve those who have a disparate collection of job descriptions, roles, and skills. They then turn the information into an effective resume. A background in writing would be beneficial if you plan to launch this type of sole proprietorship.
19. Event Planner
As a sole proprietor with an event planning business, you would handle all facets of the event planning process, including finding a venue, caterer, decorator, DJ, and event furniture supplier. You’ll typically handle part of the event setup as well. One particularly lucrative specialization is wedding event planning.
Freelance photographers take photos and video footage of virtually anything that clients want to capture. As with most business types on this list, you should specialize. A corporate photographer takes photos of a company’s staff; a wedding photographer takes photos of a wedding in an artful way; a maternity photographer takes maternity shoots. These three require different skill sets, so choose the one that best matches your background.
21. Standardized Test Tutor
As a standardized test tutor, you would coach high school and college students to improve their score in the SAT, ACT, GRE, GMAT, or LSAT standardized tests. You should specialize in one or two tests and advertise the high score you received on your website. A background in education would be helpful.
You can start a translation business if you have advanced or native proficiency in a language other than English. Businesses, churches, and schools need translators to communicate with a non-English-speaking client or group. You can start this type of business without a degree, but a certification would be beneficial.
Starting a Sole Proprietorship
Sole proprietorships are strapped with big risks. Increased personal liability, difficulty raising capital, and a perceived lack of professionalism are a few pitfalls sole proprietors must navigate.
Still, the potential financial rewards could be more than worth the risk — especially if you plan thoroughly before launching a new business and weigh the benefits and disadvantages.
Below, we’ll look at the pros and cons in more detail.
Sole Proprietorship Pros
- Full decision-making authority
- Easy to set up (No state registry necessary)
- Free to start (Other fees apply, but you won’t pay the $1000 average cost of starting an LLC)
- Simple tax filing
- Low tax rates
- Balance sheets not required by the IRS
- Full control over revenue
And here are a few of the disadvantages to structuring your business as a sole proprietorship:
Sole Proprietorship Cons
- Personal assets are at risk
- Increased personal liability for lawsuits
- Business bankruptcy means personal bankruptcy
- Difficulty raising capital
- Self-employment tax
- Many banks require businesses to incorporate before they’ll lend money
- Perceived lack of professionalism
If you’ve confirmed that you want to start a sole proprietorship, let’s go over the essential steps you must take before starting this type of business.
Step 1: Ensure a sole proprietorship is right for you.
First, is starting a sole proprietorship right for you? Or should you launch another type of business?
Choosing the right business structure is key to your venture’s success. As the SBA points out, “The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk.”
Sole proprietorships, partnerships, limited liability companies (LLCs), corporations, and cooperatives are just a few of the ways you can structure your business. While sole proprietorships andLLCs are two of the most common business structures, there are key differences between them.
Sole Proprietorship vs. LLC
A limited liability corporation (LLC) provides the business owner liability protection and tax advantages, while sole proprietors bear personal liability for their business. Additionally, an LLC can be owned by investors, while a sole proprietorship is usually owned and managed by an individual.
Once you’ve determined a sole proprietorship is right for you and your business, it’s time to talk to the experts.
Step 2: Talk to your nearest Small Business Development Center.
Before you establish your sole proprietorship, reach out to your nearest Small Business Development Center to understand the steps your state, city, or county require in order for you to operate your business legally.
Step 3: Choose a name
Choosing a name is the fun part — researching whether or not it’s taken and trademarked is where things can become difficult. Search the United States Patent and Trademark Office (USPTO) to learn whether your chosen name has been trademarked. If it hasn’t, consider filing your name with the USPTO to get a trademark on it, so no one else can operate under that name.
Step 4: Register your DBA.
As a sole proprietor, the legal name of your business is your personal name. However, if you want to operate under a different name, say, “Global Business Consulting Services,” you’d want to register a fictitious or “doing business as” name, also known as a DBA.
In many cases, you’re required to separate business and personal funds. A DBA is often necessary when opening a bank account or credit card for your business. Your state might also require follow-up steps after registration.
Most commonly, you’ll be required to publish the name you’ll be doing business under publicly — and then provide proof of publication to your local government.
A DBA also ensures no one else in your county is doing business under the same name. Bottom line? Register your DBA and do it soon.
Step 5: Purchase a domain.
Once you’ve picked the perfect name, it’s time to go after a domain. For an easy client experience, your domain name should be the same as your business. Search to see if the domain you want is taken using these ICANN-accredited databases. Even if you’re not ready to build the website, reserve or buy your domain name so no one else can.
Step 6: Register for a business license.
Even sole proprietorships need a business license to operate, in most cities. Don’t skimp here. The fines on operating without a license can be steep. You might also need your business license to open a bank account — but more on that below.
Step 7: Check on other permits or licenses.
The fees associated with not having the correct licenses or permits can be debilitating to a young business. Be sure that you’ve gotten the correct federal licenses and permits and state licenses and permits. These might include:
- A health department permit for preparing or serving food
- A federal license for transporting animals
- A health and safety training for opening a daycare
- A certification exam to become a financial advisor
- A zoning permit to operate your business from home
- Registration with the state tax authority if you have employees or collect sales tax
Do the legwork up front and find out what licenses and permits you need. The fees you’ll pay during this process are nothing compared to the fines you’ll pay if you haven’t filed the right paperwork.
Step 8: Get an employee identification number (EIN).
If you operate alone, you might not need an employee EIN and can operate and file taxes under your social security number. As soon as you hire an employee or set up a retirement plan, however, you must file for a federal employer identification number (EIN). It's free and can be obtained online.
Step 9: Open a business bank account.
It’s important to keep personal and business expenses separate when running a sole proprietorship (especially if you get audited). Opening a business bank account ensures a certain level of protection for your business funds, allows customers to pay with a credit card and make checks payable to your business, and allows your business to build a good credit history.
You want to be able to prove to the IRS you’re running your business to make a profit. This ensures the losses you experience during the first few years will remain tax deductible.
It’s also wise to build a good credit history before starting your business. While credit cards can help you out in your company’s early days when cash flow is low, the interest adds up quickly and can easily become overwhelming.
A personal loan is often a better option, and a good credit history is necessary for securing a loan of this type.
Step 10: Load up on insurance.
Because one of the biggest risks to starting a sole proprietorship is the liability it burdens the owner with, having adequate insurance is a must.
Consider property and liability coverage, auto insurance, health coverage, and disability coverage, at the very least. This can get expensive, but it ensures you and your personal assets are protected from lawsuits and professional setbacks, should they arise.
Check out this SBA article to learn more about the coverage you need.
Step 11: Pay your taxes.
As a sole proprietor, you’ll pay income tax on all income your business nets. File your sole proprietorship incomes taxes by using Schedule C on your Form 1040 and adding the income or losses your business incurred to the other income you record.
You can use any business losses to offset other sources of income, like a salary from your day job or a spouse. But be careful not to step into “hobby business” territory with the IRS. You must prove your business is not a hobby in order to lower your taxes. When your business becomes profitable, it might be time to file for corporate status or become an S corporation.
Remember, because you’re self-employed, your paychecks don’t have proper withholdings taken out at the time you’re paid. Instead, you can expect to pay quarterly estimated tax payments, and cover the difference or receive a refund for any shortage or overage come tax season.
Because of this, you should set aside money from each paycheck to cover those quarterly and annual expenses.
Position Your New Sole Proprietorship for Success
Starting a business as a sole proprietor is one of the biggest choices you’ll ever make. Though the risk is great, so is the reward — and the best part is that you can start it on your own without leasing a building, hiring others, or requiring expensive training. With the steps I shared in this post, you’ll build a strong foundation to ensure lasting success.
Editor's note: This post was originally published in September 2018 and has been updated for comprehensiveness.
Originally published Mar 17, 2021 1:45:00 PM, updated July 26 2021