FAQs about Sole Proprietorships

Where Should I Form My Sole Proprietorship?
You should form a sole proprietorship in the state you are operating the business. If operating in multiple states, you might have tax liabilities in each.
Do I Need a Lawyer to Form a Sole Proprietorship?
You don’t need to hire a lawyer to form a sole proprietorship. But if you want legal guidance, then seeking legal counsel isn’t a bad idea. In many cases, a lawyer will recommend forming an LLC to limit your personal liabilities.
Can you take out sole proprietorship loans to start your business?
Yes, you can take out a loan to grow your business as a sole proprietor. Usually, these loans will be tied to your personal credit score because the business isn’t considered a separate legal entity.
Is a sole proprietorship the same as being self-employed?
As a sole proprietor, you won’t be reported to work as an employee. So, yes, you will be considered self-employed. With that, you’ll need to pay self-employment taxes.  A good accountant is a great investment as a sole proprietor.
What’s the difference between a sole proprietor and an independent contractor?
An independent contractor completes tasks for a client in exchange for a predetermined fee. A sole proprietor may be an independent contractor. But a sole proprietor can also have other income streams, such as selling products.
Can I pay myself a salary as a sole proprietor?
As a sole proprietor, you won’t technically pay yourself a salary. Instead, your payment will be any business profits.
How do you file taxes as a sole proprietor?
As a sole proprietor, you’ll report your business income on your personal income taxes. With that, you’ll be personally responsible for the taxes.
Can a sole proprietor be tax-exempt?
No, a sole proprietor cannot be tax-exempt because they aren’t a non-profit organization.
Can a sole proprietorship have employees?
Yes, sole proprietors can hire employees.
Should I form a sole proprietorship or an LLC?

The major distinction between a sole proprietorship and LLC lies in your liabilities. An LLC is the better option if you want to protect your personal assets. But the lack of paperwork involved in a sole proprietorship is enticing, especially if you are starting a side hustle. To learn more about the differences, read our full guide.

Is it possible to close a sole proprietorship?
You can close a sole proprietorship at any time. If you have an EIN through the IRS, then send a formula letter to indicate the closing of your business.

Final Words

A sole proprietorship is the easiest type of business to set up. It’s a great way to get your business up and running quickly. But your personal assets will be at risk. If you decide that this structure is the right fit for your needs, then start building your business today!

About the Authors

Sarah Sharkey

Written by: Sarah Sharkey

Personal Finance Writer

Sarah Sharkey is a personal finance writer who enjoys helping people make better financial decisions. Sarah enjoys traveling, hiking and reading when she is not writing.

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Joe Templin

Reviewed by: Joe Templin

Charted Financial Consultant - CAP

Joe Templin is a Charted Financial Consultant (ChFC), MCEC, CEC, CLU and CAP with well over three decades consulting, coaching, and teaching. He's an author of the Amazon Kindle #1 New Release "Every Day Excellence" and host of The Human Kaizen Podcast.

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Kal Salem

Fact checked by: Kal Salem

MA Accounting - Arizona State University

A CPA and finance professional working with small businesses to educate owners and grow alongside their businesses. He holds a Masters in Accounting and a BS in Supply Chain Management. Owner at Salem CPA Services LLC.

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