Sole Proprietorships: Everything You Need to Know

By Kelly Spors
The Hartford Small Biz Ahead
Originally Published: December 10, 2020 | Updated: November 6, 2025

Key Takeaways

• Your chosen business structure affects your taxes, liability and ability to raise capital, so it’s essential you weigh the pros and cons carefully.
• A sole proprietorship is the simplest, cheapest, and most common type of business to set up.
• Sole proprietorships are owned and operated by one person and offer no separation between personal and business liability.
• Profits are reported on your personal tax return and you’re responsible for paying self-employment taxes.
• You automatically become a sole proprietor when starting a business alone, but you can transition to an LLC or a corporation as your company grows.

A sole proprietorship is the simplest and most common business structure in the United States. It refers to a business that’s owned and operated by one individual with no legal distinction between the owner and the business entity.

Of course, there are many other business structures to choose from. Alternatives to sole proprietorships include S corporations, C corporations and limited liability companies (LLCs). Each has unique attributes and benefits, and all three will generally shield your personal assets from business liability — something a sole proprietorship won’t do. Still, many entrepreneurs choose to become sole proprietors because the flexibility, low startup costs and ease of management outweigh the added protections that come with formal incorporation.

The type of business you set up will affect your ability to find investors and attract customers, so it’s essential you weigh the pros and cons carefully. Business structure also impacts how much you spend to run your business and how you pay taxes. Essential questions to ask include:

• What is a sole proprietorship in business terms compared to other options, like an LLC, S-Corp or partnership?
• What is a sole proprietorship in business going to offer me that other business structures can’t?
• What are the long-term implications of starting out as a sole trader?
  Can I convert to another business structure later if my company grows?

Read on to learn more about the ins and outs of being a sole proprietor.

Sole Proprietorship Definition

The two primary characteristics that define sole proprietorship status are:

1. The business and business assets are owned by one individual proprietor.
2. There’s no legal separation between the business and the owner.

That means if the business gets sued, the owner assumes personal liability, which makes them responsible to pay out of pocket for legal defense costs and settlement money if the business profits are not enough to cover the fees and damages.

If you’re wondering, “What is a sole proprietorship’s advantage over other company structures, given my level of risk and financial responsibility as the only owner?” An unincorporated business owned by just one person is by far the simplest type of legal entity to start and operate. This is because you don’t have to jump through all the hoops that incorporation entails, such as filing paperwork annually with your state and complying with the procedural rules of incorporation.

Many business owners—especially solo entrepreneurs who don’t plan to hire employees—choose to remain sole proprietors and not incorporate because of the simplicity.
Characteristics of Sole Proprietorship

Here’s a list of defining features that set sole proprietorships apart from other business structures…[MORE]

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