Legal & IP
Definition
A sole proprietorship is the simplest business structure — a business owned and operated by one person with no legal distinction between the owner and the business. It requires no formal registration, but the owner has unlimited personal liability for all business debts and legal claims.
A sole proprietorship is the default structure for any individual doing business without forming a separate legal entity. All business income and losses are reported on Schedule C of the owner's personal tax return — there is no separate business tax filing. The simplicity comes at a cost: the owner has unlimited personal liability, meaning creditors can pursue personal assets (savings, home, car) to satisfy business debts or judgments. Unlike an LLC or corporation, a sole proprietorship offers no legal shield between you and your business. There is no state filing required to operate as a sole proprietor, though you may need a DBA (Doing Business As) registration if operating under a name other than your own. Sole proprietors must pay self-employment taxes (15.3%) on net earnings.
Many freelancers and early-stage business owners operate as sole proprietors without realizing the liability exposure. Converting to an LLC is typically inexpensive and provides important protection. A business attorney or tax advisor can help you determine when the liability risk and tax implications make a formal entity structure worth establishing.