How to start a sole proprietorship in 2024

Brynne Conroy

BLUEPRINT

Published 4:45 p.m. UTC Jan. 5, 2024

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Starting a sole proprietorship is a low-effort endeavor. In most states, you won’t have to register any paperwork unless you’re operating under a fictitious name or “doing business as” (DBA). There’s also no legal pressure to open up a separate business bank account, though doing so is still a good idea. The lack of regulation comes with a serious downside: Sole proprietorships don’t have any liability protection.

We weigh below the pros and cons of sole proprietorships so you can make the best decision for your business. If it ends up being right for you, we’ll also walk you through all the steps of establishing your new enterprise.

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What is a sole proprietorship?

A sole proprietorship is a business classification that usually doesn’t have to register with the state. You have to be the sole member of the business to be classified as a sole proprietorship, and your business income will pass through to your individual tax returns.

Sole proprietorships don’t have any liability protection, so if you want to protect your personal assets you’ll either have to purchase insurance or form an LLC, which does come with limited liability protection.

Pros and cons of sole proprietorships

PROS	CONS
Little to no paperwork to file with the state, making this a low-cost business structure. Because there’s no liability protection to maintain, the rules around mixing business and personal expenses are looser. Because sole proprietorships can’t have investors, there’s no risk of you losing control of the business as the sole owner.	No liability protection. May need to purchase insurance. No opportunities to bring on investors. You can’t sell a sole proprietorship, so if you ever want to sell or pass your business down, you’ll need to sell each asset of the business piece by piece.

How to set up a sole proprietorship

1. Choose and register your business name

As a sole proprietor, you don’t technically need to have a business name. You can operate under your own name. However, if you are running your business under another name, that’s called a DBA. You need to register your DBA with the right authority.

There may or may not be a fee to register your DBA. Depending on where you live, you may also need to run a notification that you’re operating under the DBA in your local paper. In those instances, there are advertising fees involved.

2. Get an employer identification number (EIN)

As a sole proprietor, you are eligible to apply for an EIN (employer identification number) with the IRS. You are allowed to give clients and customers your EIN instead of your Social Security number when you fill out tax forms like the W-9. Using an EIN offers an extra layer of protection where your identity is concerned. It’s also required if you ever hire employees.

Getting an EIN is a free and simple process. You simply use the IRS online tool to answer a few simple identifying questions about yourself and your sole proprietorship. Then, you’ll immediately be issued an EIN.

3. File for permits and licenses

Just because you’re a sole proprietor doesn’t mean you’re not required to secure the necessary licenses and permits for your industry. This tends to be especially true in regulated, professional fields of work. While these requirements may be set at the state level, be sure to check county and locality requirements, too.

4. Check requirements for state tax registration

Depending on your state, you may be required to register your sole proprietorship with tax authorities. This may be on the state or local level, and it’s usually because you’re required to pay additional business taxes. Let’s take a look at two examples.

First, there’s Hawaii, where all sole proprietors are required to register with the state tax department. All businesses – including sole proprietorships – are required to charge and pay certain excise taxes, whether they sell goods or simply provide services. There may be additional excise taxes depending on which county you live in.

The second example is North Carolina, which has an abundance of property taxes compared to some other states. These property taxes are charged at the county level. While there are a lot of different opportunities for the county to charge property taxes, the rates on these taxes do tend to be low.

Sole proprietorships are subject to certain business property taxes, so you do need to inquire about registering your business with the county tax authority.

5. Open a business bank account

LLCs have to worry about piercing the corporate veil, which is most commonly achieved by mixing personal and business finances. Sole proprietorships don’t have to meet that burden as they don’t have liability protection to guard, but it’s still a good idea to open a business bank account.

Keeping your business and personal accounts separate makes filing your taxes easier. It will also be easier to defend your filing should you ever get audited.

6. Buy a domain name

In today’s day and age, having an online presence is an all-but-essential element of starting your own business. Even if you’re a sole proprietor, your clients and customers will likely appreciate the ability to learn more about you through a dedicated website. It’s also a key way to build your visibility and attract new clients or customers.

Even if you’re not ready to build your site just yet, it’s wise to secure your domain name. Just because a name is available today doesn’t guarantee that it will be available tomorrow. Research how to register a domain name so you can lock in your preferred URL.

7. Get insured

When you’re a sole proprietorship, you have no liability protection. That makes insurance all the more important. There is general liability insurance for sole proprietorships, but you may have even more specific options depending on your industry.

Outside of profession-specific policies and general liability insurance, other common coverage options include:

Product liability insurance.
Professional liability insurance.
Home-based business insurance.

Should you start an LLC instead?

Sole proprietorships and LLCs both have their pros and cons. However, according to Kelsey Grodzicki, Partner at Winter Capriola Zenner, LLC in Atlanta, Georgia, LLCs are more commonly the best choice.

“An LLC is almost always a better choice than a sole proprietorship,” Grodzicki said. “When you are operating a business as a sole proprietor, the debts and liabilities of the business become your debts and liabilities, too.”

Limited liability protection is a huge advantage. Taking that under consideration, here are the pros and cons of each business structure.

	PROS	CONS
Sole proprietorship	Easier to set up. Cheaper to run. Don’t need to worry about piercing the corporate veil.	No liability protection. Can’t have investors. Can’t sell the business itself. Instead, you have to sell each business asset individually.
LLC	Limited liability protection. Can elect to be taxed as a corporation or as a pass-through entity. Allowed to have investors.	More expensive to set up and run compared to a sole proprietorship – though it’s still a fairly low-maintenance business structure. Must keep business and personal finances separate to maintain limited liability protection. Must pay annual filing fees in most states.

Whichever business structure you ultimately go with, remember to keep future growth in mind as well. You may work for yourself now, but if you think you will eventually hire employees, don’t disregard an LLC. LLCs are also not the only option for business formation, and you can research C corps and S corps as well.

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Via ZenBusiness’ website

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Via LegalZoom’s website

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Lowest published package price

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Via Northwest’s website

Free version available

Lowest published package price

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Frequently asked questions (FAQs)

It really depends on where you live. In a lot of states, you aren’t required to register your sole proprietorship, so there are no fees at the state level. However, there may be state business taxes you’re required to pay, so you may still have to register your business with the appropriate tax authority.

Even if there are no registration requirements in your state, there are still other costs to account for, like running your DBA in the local paper, securing a domain name, securing required permits and purchasing professional insurance to make up for the lack of limited liability protection.

The primary difference between a sole proprietorship and an LLC is that an LLC provides limited liability protection. Other key differences include the fact that LLCs can opt to be taxed as corporations, and sole proprietors don’t have to worry about mixing personal and business finances in the same way LLC owners do.

You can, but you’d lose all liability protection and the ability to sell your entire business as a singular entity. If you wanted to go this route anyway, you’d simply dissolve your LLC with the state. That may include transferring business assets and licenses to yourself as an individual. Then, you would start the process of establishing a sole proprietorship according to state and local laws.

Yes, sole proprietorships can have employees. There’s extra work to do before you make your first hire, though. This is especially important to note, as in many states, there aren’t any paperwork requirements for you as a sole proprietor until you get to this point. This may even be a juncture where you want to pull in outside expertise for help.

Sole proprietorships are taxed as pass-through entities. As the owner of the sole proprietorship, you’ll most commonly report your business income on a Schedule C for your federal taxes. Do bear in mind that there may be additional taxes at the state level, like business property taxes or general excise taxes.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

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Brynne Conroy

BLUEPRINT

Brynne Conroy has over 12 years of experience writing about money, with a particular focus on women's finances and small business lending and credit products. Her debut book was an Amazon #1 New Release across multiple categories, and she has been awarded a PEN America grant for the body of her work in the field. Find her bylines on LendingTree, Her Agenda, GoBankingRates, and Business Insider, and features on MSN Money, Jean Chatzky's HerMoney, and Yahoo Finance.

Sierra Campbell

BLUEPRINT

Sierra Campbell is a small business editor for USA Today Blueprint. She specializes in writing, editing and fact-checking content centered around helping businesses. She has worked as a digital content and show producer for several local TV stations, an editor for U.S. News & World Report and a freelance writer and editor for many companies. Sierra prides herself in delivering accurate and up-to-date information to readers. Her expertise includes credit card processing companies, e-commerce platforms, payroll software, accounting software and virtual private networks (VPNs). She also owns Editing by Sierra, where she offers editing services to writers of all backgrounds, including self-published and traditionally published authors.