Going Solo in Business: Sole Proprietorship Pros and Cons Explained

The simplest type of business you can run is a sole proprietorship. It’s just you, and there’s no need to file special paperwork with the state to set it up. Because of that, you and your business are considered the same in the eyes of the law. A sole proprietorship is easy to start and manage and costs very little to operate. Its downsides are that there’s no legal protection for your personal assets, it can be tough to find outside funding, and the business usually ends with you.

Pros of a sole proprietorship

A sole proprietorship is the easiest type of business to implement. It requires no formal setup, no annual administration, no separate business income tax return, and no formal record keeping beyond tracking revenue and keeping receipts for deductible expenses.

In a sole proprietorship, you simply start selling goods or services. All bills and debts are your responsibility. All business income and expenses are reported on Schedule C of your personal tax return.

Here are nine advantages of a sole proprietorship:

1. Easy setup & low cost

Because a sole proprietorship is not a formal business structure, there are no filings or paperwork for you to complete for tax purposes before you get started — you simply begin operating. However, depending on your industry and operating location, you may need to obtain a surety bond, special license, permit, or business insurance policy.

A sole proprietorship is easy to set up because it is not legally a separate entity from its owner. This lack of separation greatly simplifies the setup and reduces the cost but comes at the price of you being personally liable for all debts and actions of the business, including actions of employees.

The ease of setup and low cost of administration/management make a sole proprietorship great for cottage industries and seasonal businesses. If you’re just starting out in a new venture, especially one without substantial liability, then it can be great to use a sole proprietorship until your business is established and growing.

2. No corporate business taxes or double taxation

As a sole proprietor, you don’t pay 21% in corporate taxes on business profits the way you would in a C corporation (C-corp). This is one of the many sole proprietorship advantages.

Instead, you keep filing your personal tax returns and claim any new income from the operation of your business as pass-through income, meaning all income is taxed at your ordinary income tax rate. In addition, sole proprietors are often exempt from state franchise or excise taxes.

These exemptions make taxes far simpler and cheaper for sole proprietorships than companies like C-corps, where revenue is first taxed at the company level and then a second time when profits are distributed to shareholders in the form of dividends. The dividend tax rate is currently 15% to 20%, meaning that you can pay as much as 41% on your taxable business profits, which excludes the income tax you pay on your salary.

The typical sole proprietorship taxes you may incur include the following:

• Ordinary income tax: As a sole proprietor, you don’t pay yourself a salary. Instead, all profits are reported on your personal tax return and taxed at your ordinary income tax rate. Your tax corresponds to the profit you earn as opposed to the cash you withdraw.
• Self-employment tax: You will need to pay self-employment tax on any income from the business, which is both the employer and employee portion of FICA tax. This means you pay the full 15.3% in FICA taxes.
• Payroll tax: If you have employees, you’ll need to collect and pay payroll taxes just like any other business. However, your withdrawals of cash from the business are non-taxable and not reported as wages. For assistance, see our guide on how to fill out Form 941.
• Sales tax: If you will sell goods, then you may need to collect and pay sales tax that varies by state but typically runs anywhere from 6% to 9%.

3. No annual reports or filings

A sole proprietorship does not require annual reports or filings with the state to stay current, so you won’t have to file anything other than your personal tax returns. For many sole proprietors, this is an advantage compared with LLCs, S-corps, and C-corps, which generally are required to file annual reports after they’re formed. These reports typically require updated lists of members or managers to be regularly maintained.

If you decide to operate as a sole proprietorship, you can avoid many filings, including the following:

• Initial filing: Required when you formally establish a company
• Annual filing: Required by most states to keep your company current
• Change of manager: Required to notify the state if you change managers or directors
• List of members: Required for many companies to notify the state when members change
• Annual audit: Required for some companies to submit annual audits
• Entity-level tax returns: Required for certain types of companies to prepare corporate tax returns and pay separate taxes on business profits

The absence of an annual filing is a sole proprietorship advantage because it removes the headache and saves you time. Plus, most states charge a fee for these annual filings (ranging from $50 to $200 or more). Additional assessments may also be in place for city and local jurisdictions.

4. Not restricted by formal business structure

Other, more formally structured businesses face certain limits on operations in addition to requirements they have to meet. Sole proprietorships are not subject to these requirements.

Listed below are some requirements of other types of business that you get to skip as a sole proprietor:

• Annual meetings: Companies, such as LLCs, are required to hold annual meetings to review lists of managers and members.
• Board meetings: Some companies are required to have some business decisions formally approved by the directors of the company.
• Recorded minutes: Formal minutes need to be kept for these meetings for LLCs and corporations.
• Shareholder votes: Any formal actions of the company, including appointing managers or admitting new members, need to be voted on.
• Formal reviews: Certain actions of the company need to be formally reviewed and managers reappointed.

5. Easy recordkeeping

With a sole proprietorship, there is no requirement to keep separate business books and to have a balance sheet, like other business structures. All you have to do is substantiate the deductions you are claiming.

While this is much simpler, keeping business and personal finances together is typically not recommended, as having separate records helps you monitor cash flow closely. In a sole proprietorship, separating finances won’t protect you from liability — but it can help with bookkeeping as the business grows. It will also make it easier if you decide to transition to an LLC or other formal business structure.

6. Decision-making control

Choices regarding vendors, sales timelines, customer acceptance, policies, etc., are all under your executive purview. There are no partners with whom to consult, negotiate, or dissent. While there’s no one else with whom you can share culpability, there is also nobody with whom you have to share your plans or profit.

As a result, the business is operated under your sole creative and strategic vision. You can make whatever business decisions you want as long as they’re legal — there’s no formal review or approval process.

7. Save taxes when hiring your children under age 18

Unlike incorporated entities, a sole proprietor can pay wages to their minor children without those wages being subject to FICA or FUTA taxes. The FICA exemption applies to wages paid to the owner’s children under 18 and applies to both the employer and employee FICA obligations. The FUTA exemption extends to children under 21.

Hiring your child offers you an opportunity for an additional wage deduction, which will ultimately reduce taxable income. For more information on this tax saving, read our article on how paying your child from your business can save taxes.

8. Simpler tax filings

Tax filings for sole proprietorships are simpler because the business income and expenses are reported directly on your personal tax return, typically using Schedule C (Form 1040). There’s no need to file a separate business tax return or deal with corporate tax forms.

This makes the process more straightforward, especially if you’re a new or small business owner. Since there are fewer reporting requirements and there is no need for complex tax structures, you will find managing taxes as a sole proprietor much easier and less time-consuming.

9. Easy to build personal brand recognition

It’s easy to build personal brand recognition with a sole proprietorship because you can operate under your own name without needing to create a separate legal entity. This direct connection between you and your business makes it simple for clients, customers, and partners to associate your reputation with your services or products.

There’s no extra paperwork or formal branding required to link your identity to your work, which helps you build trust and recognition faster. As your business grows, your personal name becomes naturally tied to your success, making it a powerful tool for building lasting credibility.

Cons of a sole proprietorship

It’s important to consider both the advantages and disadvantages of sole proprietorships. The biggest drawback is unlimited liability for you as the owner, as you can be held personally responsible for the obligations of your business. Also, if you hire employees, you’ll be personally liable for their actions.

The following are the nine major disadvantages of sole proprietorship:

1. Unlimited liability

If you’re a sole proprietor, you don’t have any of the limited liability protections offered in an LLP, an LLC, an S-corp, or a C-corp. You are personally liable for all business expenses and debts and for someone hurt on your property or harmed by your business product or a mistake you make. This means that there is no legal difference between you and your business.

Some liabilities in a sole proprietorship that you’ll be personally responsible for are as follows:

• Expenses incurred by your business
• Business-related debts
• Product-related liability
• Property-related injury
• Civil damages if you provide inappropriate or insufficient service
• Actions of employees

Because you have unlimited personal liability in a sole proprietorship, a vendor, customer, or lender can come after your personal assets to satisfy any obligations of the business.

2. Must pay self-employment taxes on all earnings

You will be required to pay self-employment taxes (Social Security and Medicare taxes) on all earnings. Unlike employees, self-employed individuals must pay both the employer and employee portions of the taxes. The tax is calculated based on the net earnings from self-employment, which is the amount earned after deducting business expenses from gross income.

The self-employment tax rate is currently 15.3%, which includes 12.4% for Social Security tax and 2.9% for Medicare tax. For 2024, the Social Security tax is only applied to the first $168,600 of your net income, but there is no cap on the Medicare tax. However, if you have earnings over $200,000 a year, then you may need to pay a 0.9% additional Medicare tax.

3. Difficult to raise capital

Structuring your business as a sole proprietorship is not a good idea if you need to raise money from outside investors. This is because there’s no real business to sell, so it’s almost impossible to raise money — unless you have tangible assets or intellectual property that investors can buy into.

A sole proprietorship can have only one owner, so they cannot accept equity investments from anyone. If they do accept an equity investment, then they are no longer a sole proprietorship but instead a partnership.

4. Inability to take on business debt

Because a sole proprietorship isn’t a formally established company, it’s difficult to take out a business loan. Instead, all debt — even funds you borrow to grow or operate your business — is personal debt. Lenders will require that any loans be personally guaranteed, meaning they can go after your personal assets in case of default.

This is because a sole proprietorship is not a standalone business entity — you are the business. By personally guaranteeing debt for a sole proprietorship, you are committing to lenders that you will repay any loans taken for business purposes, even if the business fails.

5. Can be seen as unprofessional

Customers and vendors often view sole proprietors as lacking professionalism. However, if you just want to run a small business out of your house or make some extra money in your spare time, this may not be a problem.

When someone sees a sole proprietorship, they know a sole person owns it and often has very few, if any, employees. However, if you’re organized as an LLC or corporation, customers and vendors don’t know how large or small your company is by simply looking at your name.

Some of this unprofessionalism can be dismissed by establishing a small business checking account in the name of your business. Many providers will allow you to use an alias for your business or a “doing business as” (DBA). However, this will vary by institution.

6. Difficulty with succession planning and ownership transfer

When you pass away, the business ceases to exist. Your business’s assets and liabilities are included in your estate, but while the assets can be transferred to new ownership, the entity itself cannot.

Adding a new owner to a sole proprietorship would require creating a new entity. With a new structure — such as a partnership, corporation, or multi-member LLC — the entity can continue to operate even after the original owner’s death, given the right contingencies.

7. Income loss from owner’s absence

When you take a vacation or sick day, business operations may be temporarily suspended if there’s no one around to conduct administrative or day-to-day activities. While you may have employees, many sole proprietorships operate single-handedly because of the liability issues around having employees.

For those individually operated entities, owner absence could halt production for queuing products or services or cause the business to miss out on a prospective sale. Either of these scenarios could result in lost revenue.

For a sole proprietor where this business is their sole source of income, absence could result in an impactful blow to the bottom line. This can be avoided by hiring employees, which might mean forming an LLC or S-corp, as previously discussed.

8. Hard to attract new employees

It’s harder to attract new employees with a sole proprietorship because the business structure can seem less stable or less official compared to an LLC or corporation. Many potential employees look for benefits like health insurance, retirement plans, and stock options, which sole proprietors often can’t easily offer.

Without the ability to provide these perks, it can be challenging to compete for top talent. Plus, because the business is legally tied to one person, employees might worry about long-term job security.

9. Difficulty scaling

Scaling a sole proprietorship can be difficult because the business is tied directly to the owner, limiting its ability to grow beyond what one person can manage. As operations expand, handling everything from finances to marketing to customer service alone becomes overwhelming.

Without a formal structure like an LLC or corporation, it’s also harder to bring on investors, partners, or employees who expect more legal protection and professionalism. Over time, the lack of liability protection, limited access to funding, and the personal workload can make it tough for a sole proprietorship to grow into a larger, more sustainable business.

Alternatives to a sole proprietorship

1. Single-member LLC

An LLC is the easiest company to form and administer aside from a sole proprietorship. It can be created in most states online in just 5-10 minutes for anywhere from $150 to $500. It provides limited liability protection to company owners and is taxed exactly the same as sole proprietors. It even reports its income on Schedule C like a sole proprietorship.

Unlike a sole proprietorship, a single-member LLC can elect to be taxed like an S-corp or C-corp. Learn more about the differences between single-member LLCs vs sole proprietorships.

2. S-corp

An S-corp is a closely-held corporation that is generally treated as a pass-through but also receives special tax treatment in certain areas. For instance, while the IRS does not recognize the right of partnerships or sole proprietors to pay themselves a salary, S-corp owners may pay themselves a reasonable salary and deduct that expense from corporate profit.

3. C-corp

Of the various business structures, a C-corp is the most robust and the most expensive. This is largely because a C-corp is subject to double taxation, with corporate profits being taxed at 21%. Those profits are then taxed a second time once they are distributed to company owners in the form of dividends or wages, this time at the owner’s applicable tax rate.

Frequently asked questions (FAQs)

What advantages does an LLC have over a sole proprietorship?

Why is it good to be a sole proprietor?

Do I have to register as a sole proprietor?

How do I pay taxes as a sole proprietor?

Bottom line

If you’re running a business by yourself, chances are you’re already a sole proprietor without even realizing it. A sole proprietorship is a great, informal structure with many benefits for small business owners. When deciding on a type of business structure, consider the list of sole proprietorship pros and cons. While the entity type does not offer its owners liability protection and raising capital may be difficult, it’s also incredibly easy to establish and administer.