What Is a Sole Proprietorship? How It Works, Taxes and Risks

A sole proprietorship is a business owned and run by one person that hasn't been set up as any other kind of entity. It's the default for someone who starts selling on their own, so a freelancer can be one without having filed anything.

In the US, the SBA says (checked October 31, 2026): "You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business." It also says "A sole proprietorship is easy to form and gives you complete control of your business."

How it differs from an LLC owned by one person

A single-owner LLC isn't automatically a sole proprietorship. The IRS says (page last reviewed or updated June 28, 2026): "If you are the sole member of a domestic limited liability company (LLC) and elect to treat the LLC as a corporation, you are not a sole proprietor." For how LLCs work, see What Is an LLC?.

The liability point

The SBA says (checked October 31, 2026): "Sole proprietorships do not produce a separate business entity." and "You can be held personally liable for the debts and obligations of the business." It also says "Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business." Whether that describes your business is a question for a lawyer.

Taxes, as the IRS describes them

The IRS's self-employment tax page (page last reviewed or updated October 30, 2026) says "If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C to figure net earnings from self-employment." The same IRS page says Schedule SE applies if "Your net earnings from self-employment (excluding church employee income) were $400 or more." and that "The self-employment tax rate is 15.3%."

What you owe depends on your whole tax situation, so work it out with an accountant or the IRS's own instructions.

Trading under a business name

The SBA says (checked October 31, 2026) "Sole proprietors are still able to get a trade name." A trade name changes what customers see, not the legal form; What Is a Business Entity? explains the difference.

Worked example: the profit figure on Schedule C

Sample figures: a sole proprietor who tutors invoices 52,000.00 in a year and spends 14,500.00 on business costs such as materials, software and travel between clients. The net profit is 52,000.00 − 14,500.00 = 37,500.00. That's the figure the IRS's Schedule C process is about; the self-employment tax and income tax on it depend on the rest of the owner's return, so an accountant should check it.

Where Billed fits

As a sole proprietor, every invoice and receipt feeds that profit figure. Billed's expenses page says "An expense in Billed records who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." Its financial reporting page says "Billed offers several built-in reports: Invoice Reports (paid, partially paid, and overdue), Expense Reports, Income vs Expense Reports, Top Selling Products, and Time Tracking Reports."

When this guide isn't for you

If you have a business partner, or you're weighing an LLC or a corporation for liability reasons, start with the structure guide and a lawyer. This page covers the one-owner default.

Related Articles

• How to Choose a Business Structure
• What Is a Business Entity?
• What Is an LLC?
• How to Create a Business Budget

Frequently Asked Questions

Do I have to register to be a sole proprietor?

The SBA says (checked October 31, 2026): "You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business." Check with your state and city about licenses or registering a trade name.

Am I personally responsible for the business's debts?

The SBA says (checked October 31, 2026): "You can be held personally liable for the debts and obligations of the business." Ask a lawyer how that applies to you.

Which IRS form shows a sole proprietor's profit?

The IRS says (page last reviewed or updated October 30, 2026): "If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C to figure net earnings from self-employment."