You've got an idea. Maybe you're already selling handmade ceramics on Instagram, or perhaps you've been picking up freelance coding gigs on the side during your lunch break. At some point, the question hits you: how do you start a sole proprietorship so the IRS doesn't come knocking with a list of grievances?
It’s the simplest business structure there is. No board of directors. No fancy corporate bylaws. Just you and your work. But because it’s simple, people often assume it’s automatic. It sorta is, and it definitely isn't. Honestly, most people are technically already sole proprietors the second they make their first dollar, but being "official" requires a few actual steps that keep you out of legal hot water and help you get paid faster.
The Reality of Being Your Own Boss
A sole proprietorship is an unincorporated business owned by one person. That’s it. You and the business are the same legal entity. If the business gets sued, you get sued. If the business owes money, you owe money. That’s the trade-off for not having to deal with the mountain of paperwork required for an LLC or a C-Corp. According to the U.S. Small Business Administration (SBA), the vast majority of small businesses in the country are sole proprietorships simply because the barrier to entry is almost non-existent.
You don't need to file "incorporation" papers with the Secretary of State to exist. You just exist. However, that doesn't mean you can just start shouting about your business from the rooftops without checking a few boxes first.
Choosing a Name That Won't Get You Sued
If you use your own name—let’s say "John Doe Consulting"—you usually don’t have to do anything special. But if John wants to call his business "Blue Lightning Strategy," he’s going to need a DBA, which stands for "Doing Business As."
Check your local county clerk’s office or the state's business registry. Seriously. You’d be surprised how many people start a brand only to realize someone three towns over has a trademark on the exact same phrase. Use the USPTO (United States Patent and Trademark Office) TESS database to search for trademarks. It’s a clunky website that looks like it was built in 1998, but it’s the gold standard for making sure you aren't stepping on any toes.
How Do You Start a Sole Proprietorship: The Paperwork Nobody Mentions
Even though you aren't a corporation, you might still need a license. It depends on where you live and what you do.
Selling cupcakes? You need a health department permit.
Cutting hair? You need a professional license.
Building decks? Check your local contractor regulations.
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Some cities require a general "business tax certificate" just for the privilege of operating within city limits. If you ignore this, they will eventually find you, usually via a grumpy letter with a fine attached. Go to your city or county’s website and look for the "business licenses" section. It's boring. Do it anyway.
The Tax Man and the EIN
Technically, as a sole proprietor, you can use your Social Security Number for everything. But should you? Probably not. Giving your SSN to every client and vendor is a recipe for identity theft. Instead, go to the IRS website and apply for an Employer Identification Number (EIN).
It’s free. It takes about ten minutes.
Having an EIN makes you look like a real professional. It also makes opening a business bank account a million times easier. Most banks won't even talk to you about a business account without one.
The Great Wall of Finances
Keep your money separate. Please.
This is the biggest mistake new entrepreneurs make. They let the business income hit their personal checking account, and then they use the same card to buy a latte and a new piece of software. By tax season, they are drowning in a sea of bank statements, trying to remember if that $42.11 charge at Staples was for the business or for their kid’s school project.
Open a dedicated business checking account.
Every dollar the business earns goes there. Every business expense comes out of there. When you want to pay yourself, you transfer money from the business account to your personal account. This creates a "paper trail" that makes the IRS very happy during an audit.
Understanding Self-Employment Tax
When you’re an employee, your boss pays half of your Social Security and Medicare taxes. When you're a sole proprietor, you are the boss. You pay both halves. This is known as the Self-Employment Tax, and it's currently around 15.3%.
You also need to think about Estimated Quarterly Taxes. Since nobody is withholding taxes from your "paycheck," you have to send money to the IRS every quarter (April, June, September, and January). If you wait until April 15th to pay the whole year’s tax bill, you’re going to get hit with underpayment penalties. It’s a nasty surprise. Set aside 25-30% of every check you get. Put it in a high-yield savings account and don't touch it.
The Liability Gap
We need to talk about the "sole" part of sole proprietorship.
Because you and the business are one and the same, your personal assets—your car, your house, your vintage Pokémon card collection—are at risk if things go sideways. If a client trips in your home office and sues you, they aren't just suing "The Business." They are suing you.
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This is why General Liability Insurance is non-negotiable.
Even if you work from a laptop in bed, you might need "Professional Liability Insurance" (often called Errors and Omissions). If you give a client advice that causes them to lose money, they might come after you. Insurance is the buffer that keeps you from losing your house over a bad contract or a freak accident.
Scaling and Evolution
Eventually, you might outgrow this.
Many people start as sole proprietors because it’s cheap and fast. But as the income grows, the tax benefits of an LLC (specifically an S-Corp election later on) become too good to ignore. Or maybe you want to bring on a partner. You can’t have a partner in a sole proprietorship. At that point, the "sole" part becomes a "partnership" or a "multi-member LLC."
Transitioning is usually just a matter of filing new articles of organization with your state and getting a new EIN. Don't feel like you're locked into this structure forever. It's a starting block, not a cage.
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Practical Steps to Get Moving Right Now
Stop overthinking it. You don't need a $5,000 logo or a fancy office. You need to be legal and organized.
- Check your local zoning laws. Some neighborhoods have weird rules about running businesses out of a residential home, especially if you have clients coming and going.
- Register your DBA if you aren't using your legal name. This usually costs between $25 and $100 depending on your county.
- Get that EIN. Do it through the official IRS.gov site. Avoid the "expedited service" sites that charge $200 for something that is literally free.
- Open the bank account. Take your EIN and your DBA paperwork to a credit union or a bank you trust.
- Get insured. Call an agent and explain exactly what you do. Don't skim on coverage just to save $20 a month.
- Set up a basic bookkeeping system. Whether it's QuickBooks, FreshBooks, or just a very organized Excel sheet, start tracking every penny today.
Starting this way keeps your overhead low while giving you the professional foundation to grow. You’re no longer just "doing stuff" for money; you're running a business. Treat it like one from day one, and the growth will follow much more smoothly.
Next Steps for New Business Owners
Begin by searching the Secretary of State website for your specific state to see if your desired business name is available. Once confirmed, head to the IRS website to apply for your EIN—this should be done during business hours as their online system actually "closes" at night. Finally, contact a local insurance broker to get a quote for a basic Business Owner’s Policy (BOP), which often bundles liability and property insurance for a lower rate than buying them separately.