A Sole Proprietorship Is the Easiest Way to Start a Business, But It Has Risks. What to Know

An image to accompany an article about sole proprietorships
A sole proprietorship has no startup fees, and can function as an adequate business formation as you explore or test out different side hustle ideas.
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ZenBusiness
From $0, plus government filing fees
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Swyft Filings
From $49, plus government filing fees
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Best for business and personal filings in one place
LegalZoom
From $79, plus government filing fees
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Best for step-by-step guidance
Northwest Registered Agent
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If you’ve thought about pursuing a side hustle or business, but don’t want to commit and file all the paperwork to make it official, a sole proprietorship is a happy medium.

Last year’s Great Resignation led to an entrepreneurial fever in America. In 2021, 5.4 million new business applications were filed, breaking the previous record by more than 20 percent, according to a fact sheet from the White House. Americans are more curious about self-employment than ever before. You might be one of them.

“Sole proprietorship is the simplest structure for self-employment,” says Chad Rixse, Director of Financial Planning at Forefront Wealth Partners, a company that provides financial advisory services. “It doesn’t require any special filings or special administrative duties.” As an added bonus, a sole proprietorship has no fees, and you can always change the structure of your company later as you grow. Working with an online service provider can be helpful when administrative filings arise.

Best pricing for simple filings
ZenBusiness
ZenBusiness
Best pricing for simple filings
ZenBusiness
Learn More externa link icon
  • Price:
    From $0, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

When you’ve helped launch over 300,000 businesses, you know you’re doing something right.

ZenBusiness is a Public Benefit Corporation (PBC), a type of corporation that generates services that contribute to the public good, and agrees to operate sustainably and responsibly. The Austin-based company is also a unicorn, last valued at $1.7 billion in November 2021. ZenBusiness’ website includes recommended resources for women and BIPOC business owners, along with clear statements on diversity, equity, and inclusion. ZenBusiness also has an “excellent” rating on TrustPilot, based on the average of the over 10,000 reviews it has received from customers.

Most notably, however, the company’s Starter package will let you file the essentials for free, plus the cost of state filing fees.

Starter package

  • Standard filing service: ZenBusiness team will file and return your completed documents with the state.
  • Standard filing speed: ZenBusiness will process and return the completed state documents, based on when the order is received, as well as the backlog the state is working through at that time. This can range from a few days to a few weeks, depending on the state.
  • Expense and deduction tracking: Each Starter package includes a free Money Essential tool that allows customers to easily track expenses and tax deductions for improved accounting and easier tax return preparation.
Good for Speedy Checkout
Swyft Filings
Swyft Filings
Good for Speedy Checkout
Swyft Filings
Learn More externa link icon
  • Price:
    From $49, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Swyft Filings has helped over 250,000 business owners in all 50 states with filings since its inception in 2015. Founded by a lawyer, the company’s services assist with LLC formation, DBAs, registered agents, and S corporation elections. They also work with new and established nonprofits. Continued support or professional guidance is available after you file if you want a helping hand.

The company is focused on business filings only, and does not offer personal legal counseling. Swyft Filings has a 4.8/5 rating from over 5,300 reviews on Trustpilot, a reviews aggregator service. The company has formation-specific FAQ sections, live chat, and a toll-free phone number you can call if you want to speak to someone personally. As its name suggests, Swyft Filings’ website is lightning fast and easy to navigate.

Best for business and personal filings in one place
LegalZoom
LegalZoom
Best for business and personal filings in one place
LegalZoom
Learn More externa link icon
  • Price:
    From $79, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

LegalZoom helps you set up an LLC in your state quickly, easily, and entirely online. An LLC is needed for important business functions, such as opening a business bank account. Different states have different business formation requirements; LegalZoom customizes the process for you based on what state you live in, and the company helped consumers form 447,000 businesses in 2021, according to a press release.

Mistakes can be made when trying to form an LLC by yourself, and business formation professionals can be expensive. If you want a cost-effective and convenient way to create your LLC (and keep more of the money you make from your side hustle or business when tax time rolls around), LegalZoom is a great option.

Best for step-by-step guidance
Northwest Registered Agent
Northwest Registered Agent
Best for step-by-step guidance
Northwest Registered Agent
Learn More externa link icon
  • Price:
    From $100, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Northwest Registered Agent became popular for its $39 LLC formation service, which it offered in its early years. It’s also well known for its commitment to customer service; the company’s tagline is “We’re just not annoying”, and the website manifesto outlines the family-owned business’ commitment to communication and transparency. Northwest Registered Agent’s website makes checkout very simple, and it automatically directs you to state-specific filing details, making it easy to customize your order.

A handy feature of Northwest Registered Agent’s checkout process is that you don’t totally need to know everything you might need or want from a filings perspective when you sign up. The guided checkout process explains filings as you go, allowing you to customize your order and ensure you’ve set yourself up for success.

Here’s what to know about sole proprietorships and how they work.

What Is a Sole Proprietorship?

The Internal Revenue Service defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.” The business owner can file for a sole proprietorship, but the business designation is also automatic for anyone who hasn’t formally incorporated yet and is making money with a side hustle or other venture.

“When someone starts a business, by default, they operate as a sole proprietorship unless they take the steps to formally form a Limited Liability Company (LLC), partnership, or corporation,” says Nellie Akalp, CEO and co-founder of CorpNet, a company that provides formation and compliance services.

Sole Proprietorship Advantages and Disadvantages 

There are many advantages to starting a business as a sole proprietor.

“A sole proprietorship is easy to establish,” says Laila Ghauri, a trademark and business attorney at Antares Law Firm in Austin, Texas. “A client does not need to take any legal steps to form this type of business. If the client is the only owner, and begins conducting business, he or she automatically becomes a sole proprietor.” Ghauri adds that there is no need to formally file paperwork at the federal, state, or local level, and a business owner does not need to separate taxes for the business. “Any profit the client makes is simply treated as his or her own income.” Small business owners report their business income on their personal income tax return.

Furthermore, small businesses classified as sole proprietorships aren’t required to apply for an Employer Identification Number (EIN) from the IRS unless you plan to hire employees. It’s still recommended that you do get an EIN, because an EIN can be a replacement for using your Social Security number (SSN) on tax forms, like W-9s, provided to clients. You can file for an EIN with the Internal Revenue Service for free.

Despite the ability to quickly launch your business and avoid incorporating or paying formation fees, sole proprietorships do have their drawbacks. The most significant disadvantage lies in the personal liability you’ll assume as a sole proprietor. Any business debts you incur and cannot repay can put your personal assets at risk, unless you have a business liability policy to help offset some damages. The same applies to liabilities caused by your employees — you’re personally responsible. 

Raising the working capital needed to grow your business or attracting the right investors can also be challenging. Some lenders view sole proprietorship as a riskier business structure than established, incorporated companies. Investors may be hesitant because it’s not possible to sell stock in the business, notes Ghauri. “If the business fails, all the responsibility falls on the shoulders of the owner to repay the loans. This business rarely survives if the owner dies or is incapacitated,” she says.  

Sole Proprietorship vs. LLC 

Unlike sole proprietorships, limited liability companies (LLCs) are incorporated businesses. Ownership isn’t limited to a single member; a limited liability company can have several owners, so the financial responsibility falls on the business structure instead of the owners. Most importantly, each member’s personal assets are shielded from any claims against the business. 

“An LLC is like a corporation, but twenty times more flexible,” says Sarnaa Archie, Principal Advisor at Capital Tax Advisors, a company that provides independent tax preparation, accounting, and consulting. “There can be multiple owners and investors, and the entity itself can own all the assets and be liable for damages, protecting the individual owners. For tax purposes, an LLC can be either an S-Corp or a C-Corp, depending on whether it qualifies for and elects this status.”

Related: LLC vs. S Corp: How to Ensure You Don’t Overpay on Taxes

“The advantage of an LLC over a sole proprietorship is that limited liability companies can provide a separation between the owner and the business,” says Akalp. “The main benefit of a sole proprietorship over an LLC is that the sole proprietorship is simple and easy to start. There is no paperwork or fees involved.”

Sole Proprietorship Examples 

A sole proprietorship could be a good option if you’re engaging in individual entrepreneurship and don’t want to go through the business formation process yet.

“Many professionals like accountants and lawyers are sole proprietors,” says Archie. “Even brick-and-mortar and online e-commerce businesses are sole proprietors.” Archie notes that owners can file for a “Doing Business As” (DBA) name if they want to make their company name official. “ For example, John Doe can open a baking business and do business as ‘The Cake Store.’”

In a sole proprietorship, license fees are inexpensive, and you’re typically eligible for some tax deductions, says Ben Michael, Attorney at Michael & Associates, an insurance advisory firm in Chandler, Arizona. “For a law firm, the easiest business structure to set up is a sole proprietorship. It gives you full control of everything, and it’s the structure that best accommodates lawyers who don’t have an actual office space yet or would rather just work from home.”

Ghauri also finds that many sole proprietors work as landscapers, virtual assistants, housekeepers, graphic designers and caterers. Even if they’re not required to incorporate, her firm advises these clients to be cautious and form a business structure like an LLC to protect themselves from liability.

Frequently Asked Questions About Sole Proprietorship

Do I have to incorporate as a sole proprietorship?

No. If you start a single-member business without formally registering as an LLC, partnership, or corporation, it is automatically categorized as a legal entity in the form of an unincorporated sole proprietorship. Remember that multi-member entities are not eligible to operate as sole proprietors, and must incorporate instead.

How do I report sole proprietorship earnings on my taxes?

All the profits and income earned from a sole proprietorship are claimed on Schedule C (Profit or Loss From Business) of your personal tax return.

What types of businesses or side hustles are best for sole proprietorships?

A sole proprietorship could be ideal if you’re a freelancer, consultant, creative service provider or if you have a side hustle or side gig. “If you have a self-employed side hustle or are just starting out, a sole proprietorship is often the easiest, simplest, and most cost-effective route. However, if you need a lot of liability protection, you may want a business entity structure that’s not a sole proprietorship or LLC,” says Rixse.

Start Your Sole Proprietorship Today

Setting up a sole proprietorship can give you the confidence boost you need to pursue your business idea and start making more money. When you understand how your entrepreneurial idea fits into the overall picture, you’ll be well on your way toward achieving financial independence.

Best pricing for simple filings
ZenBusiness
From $0, plus government filing fees
Jump to details
Good for Speedy Checkout
Swyft Filings
From $49, plus government filing fees
Jump to details
Best for business and personal filings in one place
LegalZoom
From $79, plus government filing fees
Jump to details
Best for step-by-step guidance
Northwest Registered Agent
From $100, plus government filing fees
Jump to details
Best pricing for simple filings
ZenBusiness
ZenBusiness
Best pricing for simple filings
ZenBusiness
Learn More externa link icon
  • Price:
    From $0, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

When you’ve helped launch over 300,000 businesses, you know you’re doing something right.

ZenBusiness is a Public Benefit Corporation (PBC), a type of corporation that generates services that contribute to the public good, and agrees to operate sustainably and responsibly. The Austin-based company is also a unicorn, last valued at $1.7 billion in November 2021. ZenBusiness’ website includes recommended resources for women and BIPOC business owners, along with clear statements on diversity, equity, and inclusion. ZenBusiness also has an “excellent” rating on TrustPilot, based on the average of the over 10,000 reviews it has received from customers.

Most notably, however, the company’s Starter package will let you file the essentials for free, plus the cost of state filing fees.

Starter package

  • Standard filing service: ZenBusiness team will file and return your completed documents with the state.
  • Standard filing speed: ZenBusiness will process and return the completed state documents, based on when the order is received, as well as the backlog the state is working through at that time. This can range from a few days to a few weeks, depending on the state.
  • Expense and deduction tracking: Each Starter package includes a free Money Essential tool that allows customers to easily track expenses and tax deductions for improved accounting and easier tax return preparation.
Good for Speedy Checkout
Swyft Filings
Swyft Filings
Good for Speedy Checkout
Swyft Filings
Learn More externa link icon
  • Price:
    From $49, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Swyft Filings has helped over 250,000 business owners in all 50 states with filings since its inception in 2015. Founded by a lawyer, the company’s services assist with LLC formation, DBAs, registered agents, and S corporation elections. They also work with new and established nonprofits. Continued support or professional guidance is available after you file if you want a helping hand.

The company is focused on business filings only, and does not offer personal legal counseling. Swyft Filings has a 4.8/5 rating from over 5,300 reviews on Trustpilot, a reviews aggregator service. The company has formation-specific FAQ sections, live chat, and a toll-free phone number you can call if you want to speak to someone personally. As its name suggests, Swyft Filings’ website is lightning fast and easy to navigate.

Best for business and personal filings in one place
LegalZoom
LegalZoom
Best for business and personal filings in one place
LegalZoom
Learn More externa link icon
  • Price:
    From $79, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

LegalZoom helps you set up an LLC in your state quickly, easily, and entirely online. An LLC is needed for important business functions, such as opening a business bank account. Different states have different business formation requirements; LegalZoom customizes the process for you based on what state you live in, and the company helped consumers form 447,000 businesses in 2021, according to a press release.

Mistakes can be made when trying to form an LLC by yourself, and business formation professionals can be expensive. If you want a cost-effective and convenient way to create your LLC (and keep more of the money you make from your side hustle or business when tax time rolls around), LegalZoom is a great option.

Best for step-by-step guidance
Northwest Registered Agent
Northwest Registered Agent
Best for step-by-step guidance
Northwest Registered Agent
Learn More externa link icon
  • Price:
    From $100, plus government filing fees
  • Additional help available:
    Yes
  • State-specific checkout:
    Yes
Overview:

Northwest Registered Agent became popular for its $39 LLC formation service, which it offered in its early years. It’s also well known for its commitment to customer service; the company’s tagline is “We’re just not annoying”, and the website manifesto outlines the family-owned business’ commitment to communication and transparency. Northwest Registered Agent’s website makes checkout very simple, and it automatically directs you to state-specific filing details, making it easy to customize your order.

A handy feature of Northwest Registered Agent’s checkout process is that you don’t totally need to know everything you might need or want from a filings perspective when you sign up. The guided checkout process explains filings as you go, allowing you to customize your order and ensure you’ve set yourself up for success.