What Does Sole Proprietor Mean?

The IRS distinguishes different business entities (or statuses) for companies of various sizes and types. The smallest of these entities is the sole proprietorship or a company that is only run by a single person. Learn more about sole proprietorship by reading below.

What Constitutes a Sole Proprietorship? 

A sole proprietorship refers to a person who earns money throughout the year that doesn’t come from investments or income from working at a traditional company. Sole proprietors can also call themselves solopreneurs, self-employed individuals, contractors, and freelancers. 

Do You Have to Fill Out Paperwork to Become a Sole Proprietor?

No. Anyone can start a business as a sole proprietor without registering with the state they live in. However, this does not exempt them from other licensing and education requirements to operate the business. For example, a hairstylist could work as a sole proprietor but would still need a license to cut hair in the state. 

How Do Sole Proprietors Pay Taxes?  

Traditional employers take out a portion of your income to cover federal taxes like Medicare and Social Security. The employee pays half of the required amount, and the employer covers the second half. However, sole proprietors need to pay their taxes on their own. They can directly pay the IRS through quarterly estimated taxes by writing a check or paying online. 

Sole proprietors are responsible for paying both the employer and employee side of federal taxes. However, they can then deduct this income from their taxes when they file each year. 

What Are the Risks of Sole Proprietorship?

There are a few risks with opting for a sole proprietorship over an LLC (limited liability company). The main risk is that your personal and professional accounts can be linked. 

This means if a customer or vendor sues you, they can go after your personal assets like your home and car. An LLC can protect you, but you need to apply for the status and pay annual fees to your state.  

What Are the Benefits of a Sole Proprietorship?

Sole proprietorships are one of the most flexible business entity options out there. You do not have to file paperwork to become an LLC, and you don’t have to answer to shareholders and other owners like a corporation or partnership. Furthermore, all of the profits are yours. 

However, all of the risks and decisions also fall on you. You will need to secure funding, acquire clients, and do the work (except for outside contractors that you work with). If this burden seems too much, consider forming a partnership with another person instead. 

Start Your Business With Organized Books

If you have an exciting business idea, consider becoming a sole proprietor where you can take on a few customers and grow your brand over time. Starting as a sole proprietor can help you decide how to develop your career. 

In the meantime, check out the free tools offered by Lendio to better organize your invoices, expenses, and other ledger items for good bookkeeping within your business.

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