To start a sole proprietorship, you simply begin doing business on your own — there is no formation document, state filing, or charter to create one.1U.S. Small Business Administration. Choose a Business Structure What takes work is everything around that: registering a business name if you’re not using your own, getting a tax ID, lining up local licenses, and setting yourself up to pay self-employment taxes. Because the law treats you and the business as the same person, your personal assets are on the hook for anything the business owes.
You Are Already a Sole Proprietor the Moment You Start
Unlike an LLC or corporation, a sole proprietorship has no articles of organization, no state filing fee, and no charter. You just start working. The price of that simplicity is that there is no legal wall between you and the business. If the business is sued or can’t pay a debt, your personal bank accounts, home, car, and other assets are exposed.1U.S. Small Business Administration. Choose a Business Structure
The business itself doesn’t file a tax return. You report income and expenses on Schedule C and attach it to your personal Form 1040.2Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Recordkeeping stays simpler than with other structures, but every dollar of profit gets hit with both income tax and self-employment tax.
Register a Business Name If You Are Not Using Your Own
If you plan to operate under your own legal name — for example, “Jane Smith Consulting” — most jurisdictions require no name registration at all. If you want to use a different name, like “Bright Path Consulting,” you’ll need to file a fictitious business name statement, commonly called a “Doing Business As” or DBA. Most states handle DBA registration at the county level through the county clerk’s office, though some route it through the Secretary of State.
DBA filing fees typically run from $10 to $100 depending on your location and how many names you’re registering. Many states also require you to publish the fictitious name in an approved local newspaper, usually once a week for about a month. Publication generally costs between $40 and $100.
Before you commit to a name, search the U.S. Patent and Trademark Office database to make sure it doesn’t collide with an existing trademark.3United States Patent and Trademark Office. Search Our Trademark Database A conflict can force you to rebrand after you’ve paid for signage, marketing, and a customer base. Check your state’s business name records and run a plain internet search too — the federal database won’t catch everything.
Get an Employer Identification Number
An Employer Identification Number (EIN) is a nine-digit number the IRS uses to identify a business for tax purposes.4Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN) You’re required to get one if you hire employees or file excise tax returns. If you work alone with no employees, you can legally use your Social Security number instead — but getting an EIN anyway is usually the better call.
Putting an EIN on invoices, W-9s, and credit applications instead of your SSN cuts your exposure to identity theft. It also makes it easier to open a dedicated business bank account and start building a business credit history separate from your personal score. Keeping business and personal finances in separate accounts simplifies your taxes and gives you a real view of cash flow.
Applying is free. Use the IRS online EIN application, which is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays from 6:00 a.m. to 9:00 p.m., and Sundays from 6:00 p.m. to midnight.5Internal Revenue Service. Get an Employer Identification Number If approved, you get your EIN right away. You can also apply by fax or mail using Form SS-4, which asks for your legal name, your trade name if different, and your reason for applying.6Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
Line Up Local Licenses and Permits
No state filing creates your sole proprietorship, but local governments impose their own requirements before you can legally operate.
Business Tax Certificate
Most cities and counties require a general business tax certificate — sometimes called a business license — whether or not you have employees or a storefront. It functions as a local tax registration and usually carries an annual fee based on projected gross receipts or a flat rate. Operating without one can trigger fines or a forced shutdown.
Zoning and Home Occupation Permits
If you run the business from home, local land-use rules control what kind of commercial activity is allowed in residential areas. Most jurisdictions require a home occupation permit, which confirms your business won’t create excessive traffic, noise, or other nuisances. Violating zoning ordinances can lead to daily penalties or legal action from your city’s planning department.
Professional and Industry-Specific Licenses
Certain fields — accounting, engineering, cosmetology, real estate, food service, and others — require professional licenses or permits from state regulatory boards. You’ll need current credentials and proof of any required education or training. Food businesses need separate health department inspections and permits. Processing times vary, so apply well before you plan to open.
Sales Tax Permit
If you sell taxable goods or services, most states also require a sales tax permit, sometimes called a seller’s permit. It’s separate from your business tax certificate and obligates you to collect, report, and remit sales tax on qualifying transactions.
Set Yourself Up for Taxes
Sole proprietors face two federal tax obligations that catch new owners off guard: self-employment tax and quarterly estimated payments.
Self-Employment Tax
You pay both the employee and employer sides of Social Security and Medicare, for a combined self-employment tax rate of 15.3%. The Social Security portion (12.4%) applies to net earnings up to $184,500 in 2026. The Medicare portion (2.9%) applies to all net earnings with no cap.7SSA. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet If your net earnings exceed $200,000 ($250,000 for married couples filing jointly), an additional 0.9% Medicare tax applies to the amount above that threshold.
You calculate self-employment tax on Schedule SE, filed with your Form 1040.8Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax You can deduct one-half of your self-employment tax when figuring your adjusted gross income, which pulls down your income tax bill.9Internal Revenue Service. Topic No. 554, Self-Employment Tax
Quarterly Estimated Payments
Nobody is withholding tax from your earnings, so the IRS expects you to pay as you go. You generally need to make quarterly estimated payments if you expect to owe $1,000 or more when you file.10Internal Revenue Service. Estimated Taxes For the 2026 tax year, payments are due April 15, 2026, June 15, 2026, September 15, 2026, and January 15, 2027. If a due date falls on a weekend or federal holiday, it shifts to the next business day.
Missing a payment or underpaying triggers a penalty based on the shortfall and how long it went unpaid. You can generally avoid the penalty by paying at least 90% of the current year’s tax or 100% of the prior year’s tax (110% if your adjusted gross income exceeded $150,000).11Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
Protect Yourself From Personal Liability
Unlimited personal liability is the biggest structural risk of a sole proprietorship. If your business is sued, can’t pay a vendor, or causes an injury, creditors can pursue your personal savings, home, and other assets.1U.S. Small Business Administration. Choose a Business Structure That’s the core difference between operating as a sole proprietor and forming an LLC, where personal assets are generally shielded from business liabilities.
You can’t remove that risk through your business structure, so insurance is your primary defense. General liability insurance covers bodily injury and property damage claims tied to your operations. If you sell advice or professional services — consulting, accounting, design work — professional liability coverage (also called errors and omissions) protects against claims that your work was negligent or caused a client financial harm.
If your business grows or takes on real risk, converting to an LLC is worth weighing. The filings and fees are higher, but the legal separation between personal and business assets can keep a single lawsuit from taking everything.
If You Plan to Hire
Hiring even one employee expands your obligations sharply. You’ll need an EIN if you don’t have one, plus several federal forms.12Internal Revenue Service. Hiring Employees
- Form I-9 verifies each employee’s identity and authorization to work in the United States. Every employer must complete it for every hire.
- Form W-4 tells you how much federal income tax to withhold. If a new employee doesn’t give you a completed W-4, you must withhold as if they are single with no adjustments.
You also become responsible for withholding and depositing federal income tax, Social Security, and Medicare from each paycheck, paying the employer share of Social Security and Medicare, and paying federal unemployment tax. The FUTA rate is 6.0% on the first $7,000 of wages paid to each employee per year, though a credit of up to 5.4% for state unemployment contributions typically brings the effective rate down to 0.6%.13Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return Most states add employer obligations of their own, including state unemployment insurance registration and workers’ compensation coverage.
Keep the Right Records
The IRS requires you to keep records supporting every item of income, deduction, or credit on your return. The general rule is at least three years from the date you filed. Several situations extend that:14Internal Revenue Service. How Long Should I Keep Records
- Six years if you underreport income by more than 25% of the gross income shown on your return.
- Seven years if you claim a deduction for worthless securities or bad debt.
- Indefinitely if you don’t file a return or file a fraudulent one.
- At least four years for employment tax records, measured from when the tax was due or paid, whichever is later.
For property used in the business — equipment, vehicles, furniture — keep records until the statute of limitations expires for the year you sell or dispose of it. Those records drive your depreciation deductions and any gain or loss when you sell.14Internal Revenue Service. How Long Should I Keep Records
At a minimum, hold on to receipts, bank statements, invoices, mileage logs, and any contracts tied to the business. Organized files, digital or paper, protect you in an audit and make Schedule C much easier when tax season comes around.