A sole proprietorship is a way to do business, but it is not a business entity per se.  A sole proprietor’s business does not exist, and is not legally, separate from the proprietor.  This is simply an individual engaged in business.  It’s that simple.  The business has no separate, legal identity of its own. Sometimes people will refer to a single member LLC that is taxed as a disregarded entity as a sole proprietor. That is because a disregarded LLC is taxed as if it was a sole proprietorship (it especially common for accountants and CPAs who deal with single member, disregarded LLCs to refer to them as sole proprietorships because those professionals must handle the accounting and tax services for those LLCs as if they were sole proprietorships). But, for liability purposes, an LLC is not a sole proprietorship (despite the tax treatment). We are not talking here about disregarded LLCs. We are talking about single individuals who conduct business without a separate legal entity. That said, the tax treatment of sole proprietorships does apply to single member, disregarded LLCs.


Any individual engaged in a trade or business can operate as a sole proprietor.  If you are an individual doing business who took no steps to create a different type of entity, you may already be a sole proprietor. [1]


Basically, it’s all you.  You may hire employees. If so, they work for you.


A sole proprietor is responsible to clients and customers, creditors, and anyone who incurs injury as a result of the goods or services.

And let’s be clear about this, because this is a big deal: sole proprietors are personally liable for all debts, obligations, and liabilities that arise in connection with the business. Sole proprietors have unlimited personal liability. This means that if a sole proprietor has personal assets, they are vulnerable to the business-related obligations and liabilities.

In most states, sole proprietors generally owe an implied contractual duty of good faith and fair dealing in carrying out the terms of any agreement into which they enter. [2]

Sole proprietors are responsible for complying with any and all laws, rules, regulations, and procedures applicable to their business endeavors and practices.


The individual sole proprietor is the business structure.


A sole proprietorship lives and dies with the sole proprietor, and can be closed by the sole proprietor.

Business earnings are the sole proprietor’s personal property.  The sole proprietor is self-employed, not an employee of the business.  Technically, earnings need not be separated from the sole proprietor’s other funds because there is no separation between the sole proprietor’s business and person, but maintaining separate accounts will likely support accounting, tax reporting, and business management.[3]


A sole proprietor must generally keep track of income and expenses using a cash, accrual, special, or hybrid accounting method selected when the first tax return is filed.


Generally, sole proprietors may file federal tax returns using a social security number as a tax identification number.  However, if you have employees you must register for and use a federal Employee Identification Number (EIN). [4]

A sole proprietor pays income tax and self-employment tax, estimated tax if applicable, excise taxes if applicable, and any applicable employer withholding taxes. [5]

Sole proprietors may deduct the costs of ordinary and necessary business expenses, [6] including reasonable wages paid to employees. [7] A sole proprietorship cannot deduct the sole proprietor’s take-home income. [8]

If before doing business as a sole proprietor you filed tax returns according to a calendar year, unless you get IRS permission to change your tax year, you must generally continue to file your sole proprietorship income tax using a calendar year.

A sole proprietorship must file federal and state tax returns, and make required tax payments.


There are generally no annual state business reports to file, requirements to fulfill, or entity fees to pay.


A sole proprietorship is simpler and less costly to form and maintain than other ways of doing business.  However, the costs of unlimited liability exposure may be great. It is important to consider all relevant factors when contemplating Choice of Entity.

[1] If you are engaged with continuity and regularity in an activity for profit, you are likely engaged in a trade or business for U.S. tax purposes, and may already be a sole proprietor.  See Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), (defining engagement in a trade or business).  Not all income producing or profit-making activities are business endeavors.  Id.  Sporadic activities, hobbies, or amusements are not trades or businesses.  Id.

[2] Sole proprietors do not owe this duty by virtue of being sole proprietors, but by virtue of entering into contracts.  See, e.g., Restatement (Second) of Contracts, § 205 (1979) (stating that “every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”); UCC § 1-304 (!977) (“[E]very contract or duty within the [UCC] imposes an obligation of good faith in its performance and enforcement.”); UCC § 1-201(19) (1977) (“Good faith means honesty in fact in the conduct or transaction concerned.”); UCC § 2-203(b) (1977) (“Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”); See also, Ronald B. Kowalczyk & Melissa Piwowar, The Application of the Implied Covenant of Good Faith and Fair Dealing in Contract Cases, 16 J. DuPage County B. Ass’n (2003-04), available at http://www.dcbabrief.org/vol161203art1.html.

[3] https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships.

[4] See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs) (for general information regarding EINs).   See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online (to apply online through the IRS website).

[5] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Sole-Proprietorships.

[6] http://www.irs.gov/uac/Business-or-Hobby%3F-Answer-Has-Implications-for-Deductions.

[7] http://www.irs.gov/publications/p334/ch08.html.

[8] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Paying-Yourself.

Contact Us

Seeking legal advice for your business? We'd love to hear from you.

get in touch