What is a Sole Proprietorship?
A sole proprietorship is the default business structure when you earn income on your own without forming a legal entity. There's no registration required — if you freelance, consult, or do gig work, you're already a sole proprietor. You and the business are the same legal entity.
How It's Taxed
All business income and expenses are reported on Schedule C of your personal Form 1040. Net profit is subject to both income tax and self-employment tax (15.3%).
Pros
- Simplest to start — no state filing, no formation documents, no annual fees
- Full control — you make all decisions without partners or boards
- Tax simplicity — one Schedule C on your personal return
Cons
- Personal liability — your personal assets (home, savings) are at risk if the business is sued or has debts
- Self-employment tax — you pay both the employer and employee shares of Social Security and Medicare (15.3%)
- No separation — the IRS sees you and the business as one entity
Recommendations
Tip
Even as a sole proprietor, open a separate business bank account. This makes expense tracking easier, simplifies tax preparation, and provides a basic layer of separation between personal and business finances.
Track all business expenses throughout the year — mileage, supplies, software, home office. These deductions reduce both income tax and self-employment tax.