What is a Sole Proprietor? The Complete US Guide for 2026

If you've ever researched going into business for yourself and becoming self-employed, you may have come across the term "sole proprietor." You might ask yourself what does this mean and how can it affect me?

In short, a sole proprietor is a self-employed person who is the sole owner of their business. As a term, it's used interchangeably with "sole proprietorship" and generally refers to the structure of a business. If you operate as a sole proprietor, you and your business are treated as one and the same for legal and tax purposes, and you're entitled to all your profits after tax.

Thanks to the relative ease with which one can become a sole proprietor, it's the most common business structure in the US. There's no federal registration or paperwork required to start — if you begin doing business activity under your own name without forming any other entity, you're automatically a sole proprietor. If you're planning to start a small business it might be the right option for you.

What is a sole proprietor business?

A sole trader, also known as a sole proprietor or sole proprietorship, is a straightforward business structure where one individual operates and owns the entire business. It's the simplest way to start a business because it doesn't require filing formation paperwork with a state, unlike forming an LLC or corporation. In this setup, the owner has complete control over how the business operates and retains full autonomy in developing the business's identity and brand.

Usually, the sole proprietor is the only worker in the business they've established. However, they can hire employees, in which case they need to get an Employer Identification Number (EIN) from the IRS and handle payroll tax withholding.

But before we go any further, let's look at the advantages and disadvantages of being a sole proprietor.

Advantages of a sole proprietor

As a small business owner, these are the advantages of being a sole proprietor:

For many, the freedom to work for yourself is the biggest benefit. Sole proprietors have complete control of their business. This means they're free to run it exactly how they want and make decisions as they see fit.

Depending on the industry, sole proprietors have little to no start-up costs. This, combined with the fact that there are very few annual accounting costs, means you'll be able to keep a much firmer grip on your overheads. This financial freedom extends to your profits, where you alone get to keep everything after tax.

Sole proprietorship also offers a degree of privacy. Unlike a corporation, which typically has to file certain public records with the state, a sole proprietor's business finances stay largely private. No member of the public can see your business finances unless you choose to share them.

Drawbacks of sole proprietorship

While there are undeniable advantages to sole proprietorship, there are several downsides. As long as your business keeps running smoothly, you should be able to avoid any of these adverse effects.

Unlimited liability refers to the fact that as a sole proprietor, you are personally liable for any and all of your business's debts and legal judgments. There's no legal distinction between personal and business assets. If worse comes to worst and you suffer a big financial hit or lawsuit, creditors could come for assets such as your house, car, or personal savings.

Due to unlimited liability, some sole proprietors may have difficulty accessing finance. The private nature of your finances and the inherent risk of being self-employed means that lenders may be reluctant to offer as much as they would to an established company. This can also contribute to credibility issues, where your business is perceived as less established than an incorporated one. Some proprietors try to get over this problem by emulating the practices of successful businesses.

Being legally one and the same as your business can sometimes lead to complications when you try to sell it or transfer ownership when you retire. This is one reason many growing businesses eventually convert to an LLC (Limited Liability Company) or corporation, where the business itself is a distinct legal entity and ownership can be transferred more cleanly, with personal assets shielded from business liabilities.

Sole proprietor vs Limited company: what's the right choice for you?

Examples of sole proprietors

Lots of small shops and businesses are set up as sole proprietorships. Here are some common examples:

• Tradespeople: These are folks like builders, gardeners, landscapers, carpenters, and handymen. 
• Freelancers: People who work independently in digital and creative fields (freelancers) often operate as sole traders. This includes jobs like graphic designers, web developers, writers, marketers, and social media experts.
• Gig economy workers: These are the ones who work flexible gigs, sometimes alongside another job. Think taxi drivers, couriers, delivery folks, and tutors.

How to set up as a sole proprietor

Now that you've got a good understanding of what a sole proprietor is, let's talk about setting up as one. Here are some simple steps:

Choose a business name

As a sole proprietor, it's up to you to come up with a suitable name for your business. Choosing a business name is an important step in legitimizing yourself, so make sure to do it properly.

Your business name can be almost anything you want. Some sole proprietors keep it simple and use their own legal name (in which case no separate registration is typically needed), some go for something professional-sounding, and some choose a catchy phrase. Whatever name you choose, make sure it's a good representation of who you are and what your business does.

If you trade under a name other than your own legal name, you'll generally need to file a "Doing Business As" (DBA), sometimes called a fictitious business name or trade name, with your county clerk or state agency, requirements vary by state and even by county, so check your local rules. A few general guidelines:

• Names that are misleading, offensive, or too similar to an existing registered business may be rejected.
• Your name generally can't include terms like "LLC," "Inc.," or "Corporation" unless your business is actually formed as that type of entity.
• Names can't infringe existing registered trademarks, you can search the US Patent and Trademark Office's database before settling on one.

If you're unsure whether your name would breach any of these rules, it's safer to err on the side of caution and choose a different name.

Get an EIN (if you need one)

Sole proprietors without employees can generally use their Social Security Number (SSN) for tax purposes and aren't required to get an Employer Identification Number (EIN). However, many choose to get one anyway, it's free and instant through the IRS website, to avoid sharing their SSN with clients, to open a business bank account, or in preparation for hiring staff. If you do hire employees, an EIN is mandatory.

Check state and local licensing

There's no single federal registration for starting a sole proprietorship, but depending on your industry and location, you may need specific state or local business licenses or permits (for example, a contractor's license, a food handling permit, or a general business license from your city). Requirements vary significantly by state, county, and city, so it's worth checking with your local Secretary of State or city government.

Understand sales tax obligations

The US has no federal VAT or GST. Instead, most states (and sometimes cities) charge their own sales tax on goods and certain services, with rates and rules varying widely, a handful of states charge no sales tax at all. If you sell taxable goods or services, you may need to register with your state's department of revenue to collect and remit sales tax. Because this varies so much by state, check your specific state's requirements rather than assuming a single national rule applies.

Set up a business bank account

It's smart to keep your personal and business finances separate. Opening a business bank account makes it easier to track your income and expenses. Plus, it shows you're serious about your business.

Most banks offer business accounts with features like free transactions, accounting software integration, and sometimes even perks like discounts on business services. To get started, bring your ID, proof of address, and business registration documents.

Working as a sole proprietor and tax responsibilities

Sole proprietors don't pay a separate corporate tax rate. Instead, business profit is reported on your personal tax return and taxed in two separate ways: ordinary income tax and self-employment tax.

Pay federal income tax

You report your business profit or loss on Schedule C, which attaches to your personal Form 1040. That net profit is then taxed at ordinary federal income tax rates. For 2026, the seven federal brackets for a single filer run from 10% on the first $11,925 up to 37% on income above $626,350, with several bands in between — these are marginal brackets, so you don't pay the top rate on your entire income, only on the portion within each band.

Most sole proprietors can also claim the Qualified Business Income (QBI) deduction, generally worth 20% of qualified business income, which further reduces taxable income (subject to phase-outs at higher income levels for certain service businesses).

Pay self-employment tax

This is the part with no equivalent in employee payroll: because no employer is splitting Social Security and Medicare contributions with you, sole proprietors pay self-employment (SE) tax of 15.3% on 92.35% of net earnings — 12.4% for Social Security (capped at a wage base of $184,500 for 2026) and 2.9% for Medicare (no cap). An additional 0.9% Medicare surtax applies to net earnings above $200,000 (single) or $250,000 (married filing jointly).

You calculate SE tax on Schedule SE, and you can deduct half of what you pay as an adjustment to your taxable income.

Pay quarterly estimated taxes

Since no one withholds tax from your business income throughout the year, the IRS generally requires quarterly estimated tax payments, due around April 15, June 15, September 15, and January 15. Underpayment penalties can apply if you don't pay enough throughout the year (generally at least 90% of the current year's tax, or 100–110% of the prior year's, depending on income).

File your annual return

Schedule C and Schedule SE are filed together with your Form 1040, typically due April 15 each year (with extensions available). This is where you report your total income, claim deductions, and reconcile what you've already paid through estimated taxes.

Business insurance

To keep yourself covered, consider business insurance such as general liability or professional liability (errors & omissions) coverage. It can protect you if something goes wrong, like a client claim or an accident related to your work. Requirements and availability vary by industry and state.

Sole proprietor deductions

Claiming allowable deductions reduces your taxable profit, so it's worth knowing what you can deduct. The IRS generally allows deductions for expenses that are "ordinary and necessary" for your trade, including:

• Office costs. Phone, internet, and software subscriptions used for business can be claimed, even if you work from home and only use them partly for business.
• Travel and mileage. Business-related travel and vehicle use, calculated using either the IRS standard mileage rate or actual expenses, is deductible (ordinary commuting generally isn't).
• Marketing and advertising. Website costs, social media ads, and printed materials all count.
• Professional subscriptions and training. Trade association memberships and courses that maintain or improve your existing skills are generally deductible.
• Equipment and software. Computers and similar tools are often deductible in the year of purchase under Section 179 or bonus depreciation rules.
• Stock and materials. Goods bought to sell or use in your work are a straightforward deductible cost.
• Accounting and tax prep fees. Fees for bookkeeping, tax returns, or general business advice are deductible too.

For a home office, the IRS offers a simplified method (a flat $5 per square foot, up to 300 square feet, capped at $1,500) or an actual-cost method based on the percentage of your home used regularly and exclusively for business, check current IRS guidance before choosing between them. Keep receipts and records to support anything you claim.

Make being a sole proprietor easier 

Becoming a sole proprietor is a decision that shouldn’t be taken lightly. If you do decide to go down the self-employed route, it’s important to make sure you have the tools you need to run your business the way you want to. 

Running a business on your own means every tool needs to earn its place. Epos Now's cloud-based POS system gives sole proprietors a complete, real-time view of their sales, stock, and finances in one place, without the overhead of a full accounts team. Using an innovative cloud-based system, you’ll be able to control all the vital aspects of your business from one easy-to-use point of sale system.

Our systems can integrate with thousands of popular apps to make the process even simpler, such as key accounting integrations like Xero and Quickbooks.