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Unlike other business structures with a sole proprietorship you don’t have to register with the state making it an easy way to start a business. The lack of an administrative hurdle makes it not surprising that over 70% of businesses in the U.S. are sole proprietorships. But you’ll still need to obtain the appropriate permits and licenses to operate your business legally. Although easy to set up, you will be held personally liable for debts or lawsuits that your company faces.
What Exactly Is a Sole Proprietorship?
A sole proprietorship is an unincorporated business with a single owner. It’s the easiest type of business to set up because you won’t have to file business incorporation paperwork. At the end of the day, the owner pays personal income taxes on what the business earns.
Here’s a look at how a sole proprietorship is different than other types of businesses:
- General partnership: A general partnership must include at least two members. But otherwise, it’s very similar in terms of limited government regulation.
- Limited liability corporation (LLC): An LLC requires filing paperwork to incorporate a business entity. Once formed, an LLC is separate from its owners. So, the owner is considered a separate entity from the business and this can sometimes shield the owner from being liable in some cases. See sole proprietorship vs LLC for more information.
- Corporation: A corporation requires filed paperwork to create a separate business entity. The legal separation protects the personal assets of a business owner. But the business will be responsible for paying taxes.
Types of Sole Proprietorships
No two sole proprietorships are exactly alike. But there are a few basic types that sole proprietorships fall into.
Independent Contractor
An independent contractor accepts projects from clients on a per-contract basis. Although they may complete work for other companies, they aren’t considered employees.
- A sole proprietor can combine contract work from multiple clients to form their business income.
- Or you can stick with one regular client. As an independent contractor, the choice is up to you!
You might like to visit our full article about differences between sole proprietorships and independent contractors for more details.
Business Owner
A business owner of any kind can choose to be a sole proprietor. Business owners have more autonomy over completing the work than independent contractors.
- The business might have no employees or have several.
- You’ll still need to obtain the required licenses or permits to operate your particular business. For example, you’d need to obtain a liquor license if opening a bar.
Franchisee
A franchisee can purchase the right to open a new location of an existing business model and brand.
- The franchise owner can be a sole proprietor.
- This arrangement gives you the benefit of guidance and brand recognition from a franchisor. But you’ll have to pay royalties to the franchisor.
Examples of Sole Proprietorship Businesses
The sky is the limit when starting a business as a sole proprietor. Although there are an unlimited number of options, we share examples of some of the most common sole proprietorship businesses below.
Web Developer
A web developer builds websites for clients with the appropriate coding language. You might build sites with:
- HTML
- CSS
- WordPress
- JavaScript
WordPress is one of the easiest skills to learn for this business model.
Digital Marketer
Marketing is a key feature of most successful businesses. But many owners hire a professional digital marketer to create an internet presence. A few tasks you might complete include:
- Manage a brand’s social media accounts
- Improve a website’s SEO
- Create content for a product launch
Consider narrowing down your offering to specialize in a particular type of digital marketing.
Virtual Assistant
In today’s digital world, the skills of a virtual assistant (VA) are essential. You might help business owners complete:
- Bookkeeping
- Data entry
- Scheduling
Essentially, you’ll handle anything that a business owner doesn’t have the time or energy to tackle. Most VAs have multiple clients.
Daycare Operator
Childcare is a necessary service. If you have the skills, you could operate a small daycare.
- Provide childcare to busy parents
- You’ll likely need specialized licenses for this venture.
You could also provide pet daycare or adult daycare.
Note: although many day cares are run as a sole proprietorship, there is a large amount of liability taking care of other people’s children and if this is your structure your personal assets are on the line if someone’s kid gets hurt.
Freelance Graphic Designer
A graphic designer helps clients create the perfect images for their needs. You might create:
- Logos
- Flyers
- Social media adds
- Landing pages
Consider choosing a specialty niche to find your ideal clients.
IT Consultant or Specialist
If you are a computer whiz, providing IT services could be a great fit. You might provide
- IT troubleshooting
- Hardware setup
- Software solutions
This business might require travel to other business locations.
Freelance Writer
Freelance writing can be a lucrative opportunity if you have the skills. As a writer with a sole proprietorship, you might write:
- Books
- Blog posts
- Web pages
- Articles
- Emails
The forms of writing are limitless. Consider specializing in a particular type of writing to grow your business.
Fitness Coach
Fitness coaches can be sole proprietors. You can help your clients through:
- Personalized gym sessions
- Training schedules
Be prepared to offer plenty of motivation along the way.
House Cleaner
Some homeowners are too busy to clean. You can step in to help by:
- Doing laundry
- Cleaning floors
- Washing dishes
If you do a great job, word will get around that you are an excellent option. People tend to be very loyal to housecleaners that are fairly priced and will often keep you coming back for years.
Landscaper
Yard work is labor-intensive. But if you are up for the challenge, you can:
- Mow lawns
- Trim bushes
- Plant flowers
- Maintain gardens
By offering a suite of services, you can scale your business. Customer loyalty is high here too.
Caterer
Do people love your cooking? Catering could be the perfect fit. You will:
- Prepare large batches of food
- Delivery it to events
Get the word out by contacting local event planners.
Accountant
Accounting is a dreaded chore for most business owners. You can:
- Use accounting software to streamline business processes
- Map out a cash management plan with business owners
If you have the skills, you can build a booming business.
Photographer
A photographer can capture any special moment. Here are a few events that you can provide photography services for:
- Weddings
- Proposals
- Maternity moments
- Newborn homecomings
- Senior photos and Proms
Offer an option you feel comfortable with to build your business.
Event Planner
Planning an event takes incredible organizational skills. You can help clients plan:
- Weddings
- Anniversary parties
- Engagement parties
- Business events
- Charity auctions
Plan events that excite you!
Translator
A translator can build a sole proprietorship with their advanced language skills. Potential clients include:
- Businesses
- Churches
- Schools
If you have the language skills, you don’t need a degree for this business.
Sole Proprietorship Advantages and Disadvantages
Every business structure has pros and cons. Let’s explore both sides of the equation.
Sole Proprietorship Advantages
Starting with the advantages of a sole proprietorship:
- No formation fees: You won’t need to pay to incorporate your business.
- No filing requirement: You won’t need to wade through state documents to open your business.
- No separate bank account necessary: You aren’t required to open a business bank account, but it can come in handy.
- Easy to transition later: If you want to form an LLC or corporation in the future, that’s still a possibility.
- Easy tax preparation: You won’t have to file taxes for both your business and your personal assets. For more details take a look at sole proprietorship taxes.
Sole Proprietorship Disadvantages
Now for the disadvantages of a sole proprietorship:
- Debt liabilities: As the business owner, you are personally liable for debts.
- Legal liabilities: You will be held personally responsible for lawsuits against the company.
- Self-employment taxes: You won’t have the tax options presented by an LLC to minimize your self-employment taxes.
- Capital raising is challenging: Without a separate business entity, you might struggle to find investment capital.
- Lack of support: As a sole proprietor, you will be on your own throughout the process of building your business.
Determine if a Sole Proprietorship is Right for You
A sole proprietorship is a great option for many. In fact, over 70% of businesses in the U.S. are sole proprietorships. But it’s not the right option for everyone.
A sole proprietorship is a good fit if:
- You want to keep things simple
- You don’t want to create a separate business entity to file taxes for
- You are the only owner of the business
- You are trying a side gig to see if it makes sense for you
An LLC is a good fit if:
- You want to legally protect your personal assets
- You want to work with a partner or bring on investors
Setting Up a Sole Proprietorship
You might be wondering how to start a sole proprietorship. Typically, setting up a sole proprietorship doesn't require any formal paperwork. In most cases, sole proprietors choose to start operating under their own name to get started as soon as possible.
But here are the steps you can choose to take when setting up a sole proprietorship.
Step One: Choose a Name for Your Business
It’s possible to just use your own name. But you might want to create a different name that reflects what your business offers.
- Brainstorm business ideas
- Research businesses in your state to confirm the name isn’t already taken
- Check for internet domain availability. You should make sure your business name has a domain at least somewhat related to it to avoid confusion.
Step Two: Register Your DBA
If you want to use a name that’s not your own, you’ll need to register the DBA.
- DBA stands for ‘doing business as’
- You can register this name with the appropriate Secretary of State's office
- Trademarking the name is an option
Step Three: Purchase a Domain
A website is a critical marketing tool for most businesses. You'll need to purchase a domain to claim your website name.
- Purchase the domain name even if you aren’t ready to create a website
- Not a required step, but it will come in handy.
Step Four: Acquire the Necessary Business Licenses and Insurance
Although you don’t need to file paperwork to create a sole proprietorship, you will need the appropriate licenses to operate.
- For example, you might need a liquor license if opening a bar.
- Don’t forget to buy the appropriate insurance for your liabilities. Since you are personally liable, good insurance is especially critical.
Step Five: Open a Business Bank Account
A sole proprietor doesn’t need to open a separate business account, but it can be helpful.
- A separate bank account makes it easier to manage your finances.
- Without your personal expenses mixed in, you can more accurately track your business cash flow.
- Consider getting a credit card that is used solely for business expenses.