What is a Sole Proprietorship? | IRS Definition of a Sole Proprietorship

A sole proprietorship is a company with a single owner. Often, this single owner will file for their sole proprietorship with a Schedule C on their own 1040 tax return. Consequently, the sole proprietorship is the individual for all intents and purposes. Sole proprietorships may not need an EIN if they never hire employees, though having one is usually still advisable.

There are some challenges with a sole proprietorship, largely when it comes to risk. Because the business and its owner isn’t separate, the owner is exposed to risks associated with the business. If the business has debts, then the owner has debts. But there are also advantages to a sole proprietorship, in part because of its simplicity. It doesn’t require any additional legal work or any additional work for the purposes of tax filing.

Additionally, sole proprietors don’t have to pay business taxes, though they do need to pay self-employment taxes. Entrepreneurs considering a sole proprietorship should first consider the risk factors and the likelihood of them being sued.