To start a business as a sole proprietor, you register a trade name if you’re not using your own, get a free Employer Identification Number from the IRS, secure any local licenses and zoning approvals your work requires, open a separate business bank account, buy appropriate insurance, and set yourself up to pay quarterly estimated taxes and file a Schedule C with your personal return. There is no state formation filing the way there is for an LLC or corporation, because you and the business are the same legal entity. That simplicity is the appeal. It is also the catch.
Know What You’re Signing Up For
In a sole proprietorship there is no legal wall between your business assets and your personal ones. If the business is sued or can’t pay its debts, creditors can pursue your personal bank accounts, your home, your car, and other property you own.1U.S. Small Business Administration. Choose a Business Structure This is unlimited personal liability, and it shapes several decisions below, especially insurance.
Most sole proprietors manage the risk through insurance and careful contracts. If your work involves significant debt, physical risk to customers, or large client contracts, consider whether an LLC would fit better. You can also start as a sole proprietor and convert later.
Register Your Business Name
If you plan to operate under any name other than your own legal name, file a “Doing Business As” (DBA) registration, called a fictitious business name statement in some places. You file with your county clerk’s office or a state agency, depending on where you live. The filing usually asks for your full legal name, your home address, and the business name you want.
Most filing offices maintain a searchable database so you can check availability before submitting. Many jurisdictions accept online filings; some still require a mailed, signed original. Fees vary. Some jurisdictions also require you to publish the new name in a local newspaper for a set number of weeks.
Keep the stamped or certified copy. You’ll need it to open a business bank account, and it’s your legal proof of the right to operate under the trade name. DBAs don’t last forever. In many places they expire after five years and must be renewed.
Check for Trademark Conflicts
A county DBA approval does not protect you from trademark infringement claims. Before you commit to a name, search the U.S. Patent and Trademark Office’s federal trademark database for exact matches and similar variations. A live registration on a related good or service can expose you to a lawsuit even after your county approves your DBA.2United States Patent and Trademark Office. Federal Trademark Searching Two businesses can share a name if they operate in completely unrelated industries, so look at both the name and the category attached to each result. Focus on live registrations; dead or abandoned ones generally don’t block your use.
Get an Employer Identification Number
Federal law requires every person or business that files tax returns to include an identifying number.3Office of the Law Revision Counsel. 26 USC 6109 – Identifying Numbers As a sole proprietor you can legally use your Social Security Number, but getting a separate EIN is free, takes minutes, and keeps your SSN off invoices, W-9 forms, and bank paperwork.
Apply using IRS Form SS-4. The fastest route is the IRS online EIN application, available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays until 9:00 p.m., and Sundays from 6:00 p.m. to midnight. Answer the questions, select “sole proprietor,” and you get the EIN immediately on screen.4Internal Revenue Service. Get an Employer Identification Number Print the confirmation letter and store it with your business records.
The application asks you to name a “responsible party,” who must be an individual with control over the entity’s finances. For a sole proprietorship, that’s you. If you apply by mail, submit Form SS-4 at least four to five weeks before you need the number.5Internal Revenue Service. Instructions for Form SS-4 If your responsible party information ever changes, notify the IRS within 60 days using Form 8822-B.6Internal Revenue Service. About Form SS-4, Application for Employer Identification Number
Confirm Zoning and Get Any Required Licenses
Before you start operating, confirm your intended location is zoned for the type of work you plan to do. Your local municipal planning or zoning department maintains maps showing where commercial, residential, and mixed-use activities are permitted. Running a business from a location not zoned for it can bring fines or a shutdown order. This matters for home-based businesses too.
Depending on your industry and city, you may also need one or more of the following:
- A general business license or business privilege tax certificate from your city or county.
- A professional license from a state regulatory board, common in fields like construction, healthcare, cosmetology, and real estate. These typically involve proof of education, exams, and continuing education for renewal.
- Health or safety permits, common for food-related businesses, childcare, and businesses open to the public.
Check with your local government early. Discovering a permit requirement after you’ve signed a lease is far more expensive than researching it first. If an inspector cites a code violation during a site visit, you’ll usually get written notice with a deadline to fix it; ignoring the notice can lead to daily fines or denial of your permit.
Open a Business Bank Account
A separate account isn’t legally required for sole proprietors, but it’s one of the highest-value steps you can take. It creates a clean paper trail for taxes, makes bookkeeping far easier, and looks more professional to clients who write checks to your business name.
To open the account, bring your stamped DBA certificate (if you use a trade name) and your EIN confirmation letter. Banks use these to verify your identity under federal anti-money laundering rules. Minimum balances, opening deposits, and monthly fees vary, so compare a few institutions before committing.
Get the Right Insurance
Because your personal assets are on the line for every business obligation, insurance is your primary financial safety net. Two policies cover most sole proprietors:
- General liability insurance, which covers bodily injury on your premises, damage to someone else’s property, and certain advertising-related claims. This is the baseline for businesses that interact with customers in person.
- Professional liability insurance, also called errors and omissions (E&O), which protects service-based businesses against claims that your work or advice caused a client financial harm. Consultants, accountants, IT professionals, and similar providers typically need it.
Premiums depend on your industry, expected annual revenue, where you operate, and your coverage limits. Some clients and landlords will require a certificate of insurance before they sign with you, so getting coverage early prevents delays.
Set Up for Self-Employment Taxes
You don’t have an employer withholding taxes from your paycheck, so you owe both the employee and employer shares of Social Security and Medicare yourself. This combined obligation is the self-employment tax, at 15.3% (12.4% Social Security plus 2.9% Medicare).7Office of the Law Revision Counsel. 26 US Code 1401 – Rate of Tax The Social Security portion applies only to net self-employment income up to $184,500 in 2026; the Medicare portion has no cap.8Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet An additional 0.9% Medicare tax applies to net self-employment income above $200,000 ($250,000 for joint filers).
The tax is calculated on 92.35% of your net earnings, not the full amount. You can also deduct half of your self-employment tax when calculating your adjusted gross income, which lowers your income tax.9Internal Revenue Service. Topic No. 554, Self-Employment Tax
Pay Quarterly Estimated Taxes
Because no one is withholding for you, the IRS expects four estimated payments a year. For 2026 the deadlines are:
- April 15, 2026, covering income earned January through March
- June 15, 2026, covering April and May
- September 15, 2026, covering June through August
- January 15, 2027, covering September through December
These payments cover both regular income tax and self-employment tax.10Internal Revenue Service. Publication 509 (2026), Tax Calendars Underpayment brings a penalty based on the shortfall, how long it went unpaid, and the current quarterly interest rate. You avoid the penalty if you owe less than $1,000 at filing time, or if you paid at least 90% of your current year’s tax or 100% of your prior year’s tax, whichever is smaller. If your prior-year adjusted gross income was over $150,000, the prior-year safe harbor rises to 110%.11Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
File Schedule C and Claim Your Deductions
You report your business income and expenses on Schedule C, filed with your personal Form 1040. The form walks through standard categories: advertising, vehicle expenses, insurance, office supplies, rent, utilities, contract labor, travel, business meals, and more.12Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business Your net profit flows to your 1040 and is also the starting point for calculating self-employment tax on Schedule SE.
If you use part of your home regularly and exclusively for business, you can claim a home office deduction. The simplified method lets you deduct $5 per square foot up to 300 square feet, so a maximum of $1,500.13Internal Revenue Service. Simplified Option for Home Office Deduction The regular method deducts the actual percentage of your home expenses (mortgage interest, utilities, insurance, repairs) tied to the business portion. It takes more recordkeeping but can produce a larger deduction when your office is a meaningful share of the home.
Sole proprietors may also qualify for the qualified business income (QBI) deduction under Section 199A, which allows you to deduct up to 20% of net business income from your taxable income. The deduction was made permanent by legislation signed in 2025. Below the statute’s income threshold you get the full 20% without added limits. Above it, the deduction phases out for certain service professions (law, accounting, consulting, healthcare) and, for higher-income filers, becomes subject to limits tied to W-2 wages paid or the value of qualified business property.14Office of the Law Revision Counsel. 26 US Code 199A – Qualified Business Income
Keep the Right Records for the Right Length of Time
The IRS requires you to keep records that support every item of income, deduction, or credit on your return. How long depends on the situation:
- Three years is the standard retention period for most tax records, measured from the date you filed the return.
- Six years applies if you failed to report income amounting to more than 25% of the gross income shown on your return.
- Seven years applies if you claimed a deduction for worthless securities or bad debt.
- Indefinitely if you did not file a return or filed a fraudulent one.
These periods apply to the underlying records (receipts, bank statements, mileage logs, invoices), not just the returns themselves.15Internal Revenue Service. How Long Should I Keep Records Keep copies of every filed return as well. Organized digital folders by year and category are enough for most sole proprietors; accounting software can automate much of it.
If You Hire Someone Down the Road
The rules above cover a sole proprietor working alone. The moment you bring on an employee, several federal obligations start. Every new hire must complete Section 1 of Form I-9 by their first day, and you have three business days after their start date to examine their documents and complete Section 2.16U.S. Citizenship and Immigration Services. Form I-9, Employment Eligibility Verification You retain each I-9 for three years after hire or one year after employment ends, whichever is later.17U.S. Citizenship and Immigration Services. Retaining Form I-9
You must withhold federal income tax and the employee’s share of Social Security and Medicare, and pay the employer’s matching share plus federal unemployment tax (FUTA) at 6.0% on the first $7,000 of each employee’s wages, usually offset by a credit for state unemployment taxes paid.18Internal Revenue Service. Topic No. 759, Form 940 – FUTA Tax Return The federal minimum wage is $7.25 per hour, though many states and cities set a higher floor; follow whichever is greater, and pay non-exempt employees time and a half for hours over 40 in a workweek.19U.S. Department of Labor. Wages and the Fair Labor Standards Act Keep employment tax records for at least four years after the tax is due or paid, whichever is later.15Internal Revenue Service. How Long Should I Keep Records
Most states also require workers’ compensation insurance once you have employees. Sole proprietors with no employees are generally exempt. State rules vary on when coverage becomes mandatory and what it costs, so check with your state’s workers’ compensation agency before your first hire date.