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Sole proprietorship
A sole proprietorship is a business owned by one person who is responsible for all of the business’s debts, taxes, and legal liabilities.
What is a sole proprietorship?
A sole proprietorship is the simplest and most common way to run a small business. If you’re doing business on your own and haven’t formed a limited liability company (LLC) or corporation, you’re automatically considered a sole proprietor.
Because a sole proprietorship is a business owned and operated by one person, there’s no legal separation between you and the business. This makes you and your company the same entity in the eyes of the law.
Some other key traits of a sole proprietor include:
- You’re personally responsible for all profits, losses, and debts
- You report business income on your personal tax return
- You don’t need to file formation paperwork to get started
How does a sole proprietorship work?
As a sole proprietor, you:
- Make all business decisions
- Keep all profits
- Are personally liable for business debts, lawsuits, and obligations
Personal liability is the biggest risk and the main reason insurance and smart risk management matter.
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How do I start a sole proprietorship?
Sole proprietorships are most suitable for people who want to get into business quickly, with fewer legal complications and fees.
The process to create a sole proprietorship is relatively easy:
- Register your business with your state tax authority.
- Secure a business license, if required in your area.
- Set up a business checking account to deposit business income and pay expenses.
You can literally go into business as a sole proprietor in a single morning or afternoon. In contrast, establishing a corporation requires hiring a lawyer to draft articles of incorporation and other business expenses.
What are the advantages of doing business as a sole proprietorship?
There are several advantages to doing business as a sole proprietorship, including:
- It’s the easiest and cheapest type of business to start and operate.
- It doesn’t require sharing power with corporate officers or board members.
- Sole proprietors receive all business revenue personally, paying for expenses and retaining profits as they see fit.
- Sole proprietors can report business income on their personal tax return; corporations must file a tax return for personal finances and a tax return for their business.
- Owners don’t have to pay state unemployment tax on themselves.
- Owners can mix personal and business assets, although this also creates some risk.
What are the disadvantages of doing business as a sole proprietorship?
Disadvantages of sole proprietorships include:
- Sole proprietors are personally responsible for the losses, loans, and legal liabilities of the business. As a result, they can lose all their personal assets if their business fails or gets sued.
- Owners of sole proprietorships have limited opportunities to raise capital. Unlike someone who forms a corporation, a sole proprietorship can’t sell shares in the business to generate cash for buying equipment, real estate, or other business assets.
- Sole proprietors cannot collect unemployment benefits if their business fails.
- Since they’re not legally distinct from their owners, sole proprietorships have difficulty surviving the death or disability of their founders.
- Because sole proprietorships are closely bound to their owners, they can be difficult to sell. They tend to lose their value once the founder stops doing business.
What are the tax obligations for sole proprietors?
Sole proprietors don’t file a separate business tax return. Instead, you report business income and expenses on your personal return.
What to expect:
- File Schedule C with your Form 1040
- Pay self‑employment tax, which includes Social Security and Medicare
- Make quarterly estimated tax payments if you expect to owe taxes
Sole proprietors should generally set aside 25-to-30 percent of profits for taxes to avoid surprises.
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What are the insurance implications of forming a sole proprietorship?
Sole proprietors have the same legal liabilities corporations do, and they are generally eligible for protections with most S corporation business insurance policies.
For example, if a service they perform for a client has a negative financial impact or causes property damage, the client could take legal action. In this case, professional liability or errors and omissions insurance could provide financial protection.
The difference is a sole proprietor is personally responsible for all legal judgments and settlements, unlike the owner of a corporation or LLC, whose legal structure shields against personal liability.
It’s essential for sole proprietors to have robust insurance protection to protect their personal assets.
Practical risk management for sole proprietors
Insurance is essential, but it works best alongside good risk controls, such as:
- Keep separate business and personal bank accounts
- Use written contracts for every client or project
- Back up data and use strong passwords and multi‑factor authentication
- Document your work and communications
- Follow industry best practices and safety standards
These steps can help reduce claims and lower your insurance costs.
What insurance should sole proprietors consider buying?
Sole proprietors should consider protecting themselves against their major risks of doing business by purchasing the right insurance policies, including:
- General liability insurance covers third-party injuries, property damage, and advertising injuries.
- Professional liability insurance, also called errors and omissions (E&O) insurance, protects against claims of negligence, mistakes, or missed deadlines.
- Cyber insurance covers data breaches, hacking, ransomware, and digital risks.
- Workers' compensation insurance is required in most states if you have employees, and sometimes if you're a contractor in certain states.
- Business owner's policy (BOP) is a bundle that combines general liability and commercial property insurance for broader protection, but typically costs less than if you purchased the policies separately.
Business insurance is usually tax deductible, since it counts as a cost of doing business.
Should you stay a sole proprietor or form an LLC?
Many business owners start as sole proprietors and later form an LLC for added liability protection.
You might consider switching to an LLC if:
- Your income is growing
- You’re taking on bigger clients or contracts
- You want to protect personal assets like your home or savings
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Updated: January 23, 2026
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