What Is a Sole Proprietorship and When Should You Use One?

A sole proprietorship is the simplest and one of the most widely used forms of business structure across the world. It is typically an unincorporated enterprise that is owned and operated by a single individual, without the legal separation between the owner and the business that exists in corporations or other formal entities. Because of its relatively straightforward nature, the sole proprietorship is often the starting point for entrepreneurs, freelancers, and consultants alike.

There can be significant benefits to utilizing the sole proprietor structure, but also various inherent risks and legal requirements. Most importantly, these elements can also vary depending on the location and industry. 

We’ve put together this article to provide entrepreneurs with practical insights into this type of structure. It takes a global perspective, rather than being limited to a single jurisdiction, ensuring relevance no matter where in the world you operate.

Defining a Sole Proprietorship

What is a sole proprietorship? It’s an unincorporated business entirely owned and managed by a single person. Unlike corporations or limited liability companies (LLCs), the sole proprietorship business type does not create a separate legal entity. This means the business and the owner are legally inseparable.

In practice, while the sole proprietor enjoys absolute control over decision-making and retains all business profits, they are also personally accountable for debts and liabilities. This is very different to the situation with corporations and LLCs, where liability is typically limited to the business itself. Similarly, partnerships see risks and responsibilities shared between two or more individuals.

The structure is often chosen for its ease of creation and minimal regulatory requirements, making it particularly attractive for individuals starting their commercial journey, particularly in service-based industries.

Key Characteristics of a Sole Proprietorship

The primary characteristics of this type of entity include:

• Individual ownership – The business belongs entirely to one person, who exercises full control over strategy, operations, and finances. Unlike partnerships, which distribute authority and decision-making between multiple owners, the sole proprietorship sees risk and reward applied to a single individual.
• Unlimited liability – The business is not legally separate from its owner. So, any debts, contractual obligations, or legal claims against the enterprise are enforceable against the owner’s personal assets. This includes savings, property, and other holdings.
• Simple taxation – Income from the business is reported on the owner’s personal tax return, with profits taxed at individual rates. This pass-through taxation simplifies reporting and avoids the double taxation issue associated with corporations.
• Regulatory flexibility – In many jurisdictions, there are few or no requirements for annual filings, board meetings, or shareholder records. For individuals seeking to operate quickly and efficiently, this flexibility can be key.

Advantages of a Sole Proprietorship

There are various potential advantages to this approach, including:

• Simplicity – Establishing a sole proprietorship typically involves little more than registering a business name, if required, and obtaining any relevant permits or licenses. It also doesn’t require extensive operational premises, which is useful for those asking, “Should I use my home address for my business​?” This low barrier to entry allows entrepreneurs to begin operations quickly.
• Control – The owner retains full authority over all decisions and operations. This autonomy eliminates conflicts among partners or shareholders and enables fast decision-making.
• Low costs and formalities – The absence of complex legal structures or corporate governance requirements reduces administrative expenses and paperwork burdens. For freelancers, consultants, and early-stage entrepreneurs, these lower burdens can be key to efficiency.
• Broad suitability – The structure is suitable for individuals in a wide range of industries and operational types. This includes freelancers, consultants, tradespeople, and early-stage entrepreneurs.

Disadvantages and Risks

Alongside the benefits, it’s also vital to understand the potential drawbacks. These include: 

• Unlimited liability – The business and the owner are legally inseparable, which means that creditors and claimants can pursue the owner’s personal assets to settle debts or legal judgments. This exposure creates a significant level of personal financial risk.
• Limited capital access – Sole proprietors typically rely on personal savings, loans, or informal funding sources. Without the ability to issue shares or attract equity investors, growth can be restricted in comparison to corporations or partnerships.
• Lack of continuity – A sole proprietorship is tied to the individual owner, which means that the business effectively ends upon the owner’s death, incapacity, or decision to close operations. This lack of permanence can be problematic for building long-term enterprises or securing outside investment.
• Less credibility – Larger clients, lenders, or suppliers may view incorporated entities as more stable or trustworthy. This can make it more difficult for sole proprietors to secure contracts or financing.

When a Sole Proprietorship May Be Appropriate

Despite its limitations, a sole proprietorship can be the most suitable option in certain circumstances. For instance, businesses with low risk and minimal liability exposure—such as freelance writing, tutoring, consulting, or digital services—can find that the structure allows for flexibility and low cost without unnecessary formalities.

It may also be an effective option during the early stages of a business, particularly when the goal is to test the market before committing to a more complex legal structure. Entrepreneurs can test out and validate their ideas with minimal expense before taking the steps toward incorporation if the venture grows.

Additionally, independent professionals often benefit from sole proprietorships. For consultants, contractors, and creatives who value autonomy and have limited liability risks, this structure provides both simplicity and efficiency.

In a global context, the suitability of a sole proprietorship depends on local regulations. In some countries, informal or micro-businesses operate seamlessly as sole proprietorships. In others, stricter tax or licensing requirements make the structure more complex. It is essential to examine local rules thoroughly before proceeding.

When to Consider Other Business Structures

For entrepreneurs seeking liability protection, a sole proprietorship may be insufficient. In these cases, forming an LLC or corporation is more likely to provide a clear separation between personal and business assets. This protection is particularly important for businesses with significant debts, contracts, or physical operations.

Corporations also provide potential advantages in taxation and fundraising. They can attract investors, issue shares, and build long-term continuity beyond the life of the founder. On the other hand, partnerships may be more appropriate when two or more individuals simply wish to share resources, expertise, and responsibility.

In the U.S., those looking into what is an S Corp election can find another potential alternative. While it is not a business structure in itself, it allows corporations or LLCs to be taxed as pass-through entities. This combines certain liability protections with more favorable tax treatment. Entrepreneurs in other jurisdictions may find comparable alternatives—such as the Sole Trader designation in the U.K.—although the terminology and specific benefits are likely to vary.

Steps to Establish a Sole Proprietorship

Establishing a sole proprietorship is generally straightforward, although the requirements may differ globally. The process typically begins with choosing a business name. In many jurisdictions, this involves registering a “doing business as” (DBA) name if the owner does not wish to operate under their personal name.

The next step is registering with local or national authorities. This may include tax registration, obtaining a business license, or complying with sector-specific regulations. Depending on the type of business, additional permits may be required, such as food handling or professional certifications.

Opening a separate business bank account is also strongly recommended. This simplifies financial management and maintains clear records, even though there is not always a legal requirement to separate personal and business funds.

Because global regulations differ widely, entrepreneurs should take the time to research local rules or seek professional guidance. Business formation and strategy consulting services can be invaluable collaborators for ensuring compliance, identifying risks, and preparing for potential restructuring if the business grows beyond the sole proprietorship model.

FAQs

What is a sole proprietorship?

A sole proprietorship is an unincorporated business owned and managed by one person, with no legal distinction between the business and the owner.

How is a sole proprietorship taxed?

Profits are reported on the owner’s personal income tax return. This pass-through taxation avoids corporate-level taxes but may result in higher individual tax liability depending on jurisdiction.

What are the risks of operating as a sole proprietor?

The primary risks are unlimited personal liability for business debts and obligations, limited access to financing, and the lack of continuity if the owner exits or passes away.

Can a sole proprietorship become a corporation later?

Yes. A sole proprietor can restructure into an LLC or corporation, transferring assets and operations into the new entity to obtain liability protection and improved access to capital.

Is a sole proprietorship recognized worldwide?

Yes, in some form. While the specific terminology and rules differ across jurisdictions, the concept of an individual operating an unincorporated business exists globally.

References

IRS. (2025, August 8). Sole proprietorships. IRS. https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships 

UK Government. (2025). What a sole trader is. UK Government. https://www.gov.uk/become-sole-trader