How to Start a Sole Proprietorship: EIN, Taxes, and Licensing

To start a sole proprietorship, you generally just begin operating: no formation documents get filed with your state. What you do need to handle is a short list of practical steps — register a business name if you’re not using your own, get an Employer Identification Number, check local licensing and zoning, open a separate bank account, and set yourself up to pay self-employment taxes. Knowing how to start a sole proprietorship also means understanding the tradeoff that comes with the simplicity: there is no legal separation between you and the business, so you personally own all the profits and bear all the liabilities.¹

Register a Business Name Only If You Need One

If you operate under your own legal name — “Jane Smith, Consulting,” for example — you generally do not need to file anything to register the name. If you want to trade under a different name, like “Brightline Consulting,” you need to register a Doing Business As (DBA) name, sometimes called a fictitious business name. The filing goes to your county clerk’s office or a state agency, depending on where you’re located.²

The form asks for your full legal name, business address, and a short description of what the business does. Fees are usually under $100, though the exact amount varies by jurisdiction.² Once it’s processed, you get a certified or stamped copy back. Hold onto it. You’ll need it to open a business bank account, and some contracts will ask for it too.

A few jurisdictions require you to publish notice of your fictitious name in a local newspaper, and a few states don’t require DBA registration at all. Check your local rules before paying anything.

Get an Employer Identification Number

An Employer Identification Number (EIN) is a nine-digit number the IRS assigns for tax filing and reporting. You apply using Form SS-4.³ Sole proprietors with no employees can legally use their Social Security Number for tax purposes, but getting an EIN is free and keeps your SSN off invoices, W-9 forms, and other paperwork that circulates outside your control.

On the form, your legal name goes on Line 1, your trade name (if any) on Line 2, and a description of your primary business activity in its own section. The “Responsible Party” section on Lines 7a–7b identifies you as the person who controls the business, which is how the IRS links the EIN back to your personal tax records.⁴

The fastest route is the online application at IRS.gov/EIN, which issues the number immediately. Applying by mail takes about four to five weeks.⁴ Save the confirmation letter the IRS sends. Banks and government agencies will ask for it.

Check Local Zoning and Licensing

Before you start operating, confirm your intended location complies with local zoning. This matters most for home-based work, since residential zones often restrict signage, customer traffic, noise, and storage of certain goods. Your city or county planning department can tell you what’s allowed at your address and whether you need a home occupation permit.

Many cities and counties also require a general business license or operating permit, even if you use your own name and work from home. Fees and renewal schedules vary widely, so contact your local government early.

Some industries need a professional or occupational license before you can legally provide services. Common examples:

Construction, which usually requires state-level contractor licensing
Cosmetology and barbering, licensed at the state level
Accounting, where CPA certification is required for certain services
Healthcare fields — medical, dental, nursing, and therapy licenses
Retail, which typically requires a state sales tax permit or seller’s permit for taxable goods

If you sell physical products, most states will require you to register for a sales tax permit and collect sales tax from buyers. Each state sets its own rules on which goods are taxable, what the rates are, and how often you file. Your state’s department of revenue or taxation is the source to check.

Open a Business Bank Account

Keeping your business and personal finances in separate bank accounts is one of the most valuable habits you can build early. A dedicated account makes it far easier to track income and expenses, prepare taxes, and present yourself professionally to clients and vendors.

Most banks will ask for:

Government-issued photo ID (driver’s license, state ID, or passport)
Your EIN confirmation letter from the IRS, or your SSN if you didn’t get an EIN
Your DBA certificate, if you registered a fictitious name

Requirements vary. Some banks want two forms of ID, others may ask for a business license. Call ahead or check the bank’s website. Once the account is open, run all business income and expenses through it. Mixing personal and business funds makes bookkeeping harder and complicates your tax filing.

Set Up for Federal Taxes

As a sole proprietor, your business income flows directly onto your personal return. There is no separate business return. You report revenue and expenses on Schedule C (Form 1040), which calculates your net profit or loss for the year.⁵ That net profit gets added to your other income on Form 1040 to determine total taxable income.

Self-Employment Tax

On top of income tax, you owe self-employment (SE) tax on your net earnings. This is Social Security and Medicare — the same taxes an employer and employee split in a traditional job, except you pay both halves. The combined rate is 15.3 percent: 12.4 percent for Social Security on earnings up to $184,500 in 2026, plus 2.9 percent for Medicare on all earnings.⁶ If your net earnings exceed $200,000 ($250,000 for married couples filing jointly), an additional 0.9 percent Medicare tax applies to the amount above that threshold.

You calculate SE tax on Schedule SE and must file it if your net self-employment earnings are $400 or more for the year. You can deduct half of your self-employment tax when calculating adjusted gross income, which lowers your income tax bill.⁷

Quarterly Estimated Payments

No employer withholds taxes from your income, so you generally need to make quarterly estimated payments to the IRS using Form 1040-ES. The 2026 due dates are:

First quarter: April 15, 2026
Second quarter: June 15, 2026
Third quarter: September 15, 2026
Fourth quarter: January 15, 2027

You can skip estimated payments if you expect to owe less than $1,000 in total tax for the year, after subtracting withholding and refundable credits. Otherwise, underpaying can trigger a penalty. You can also skip the January 15, 2027 payment if you file your 2026 return and pay the full balance by February 1, 2027.⁸

What You Can Deduct

You can deduct expenses that are ordinary and necessary for running your business. “Ordinary” means common in your industry; “necessary” means helpful and appropriate for your work. Common deductions include office supplies, software subscriptions, advertising, business mileage, a portion of your home if you use a dedicated space exclusively for work, and health insurance premiums you pay for yourself. Each deduction reduces your net profit on Schedule C, which lowers both your income tax and your SE tax.

Understand Your Liability and Get Insurance

The biggest financial risk of a sole proprietorship is unlimited personal liability. If the business is sued or can’t pay its debts, creditors can go after your personal assets: home, savings, car, and other property.¹ Unlike an LLC or corporation, a sole proprietorship gives you no legal shield. Insurance is the main tool for managing that risk without changing your business structure.

Coverage most relevant to sole proprietors:

General liability insurance covers bodily injury, property damage, and related legal costs if a third party is harmed by your business activities.⁹
Professional liability insurance, also called errors and omissions coverage, protects service-based businesses — consultants, accountants, web developers — against claims that your work caused a client financial harm.
A home-based business rider or endorsement adds limited coverage for business equipment and business-related injuries that your homeowner’s or renter’s policy would otherwise exclude.

The right combination depends on your industry, whether clients come to your workspace, and how much equipment you use. An agent who works with small businesses can help you match the policy to the actual risks.

What Changes When You Hire

Many sole proprietors eventually bring on help. When you do, a new set of federal obligations kicks in. You must have an EIN if you don’t already, then handle the following for each new hire:

Form W-4, filled out on or before the employee’s first day, so you know how much federal income tax to withhold.¹⁰
Form I-9, verifying identity and work eligibility within three business days of the start date.¹¹
New hire reporting to your state’s registry, as required by federal law.¹⁰

As an employer, you withhold federal income tax and the employee’s share of Social Security (6.2 percent) and Medicare (1.45 percent) from each paycheck, and you pay a matching employer share.¹⁰ You also owe federal unemployment (FUTA) tax at 6.0 percent on the first $7,000 of each employee’s annual wages, though a credit of up to 5.4 percent for state unemployment contributions typically reduces the effective FUTA rate to 0.6 percent.¹² Most states also require workers’ compensation insurance once you have employees. Check your state labor department.

Keep Records From Day One

Good records make tax filing easier and protect you in an audit. Track all income, expenses, and deductions throughout the year: receipts, invoices, bank statements, mileage logs, contracts. Digital or paper is fine, but back up digital files regularly.

The IRS requires you to keep records that support items on your return for at least three years after you file. Some situations need longer:

Three years for most income, expense, and deduction records
Four years for employment tax records, measured from when the tax was due or paid, whichever is later
Six years if you underreport income by more than 25 percent of the gross income on your return
Seven years if you claim a loss from worthless securities or a bad debt deduction
Indefinitely if you do not file a return

Records for business property — equipment, vehicles, furniture — should be kept as long as you own the asset plus the applicable retention period after you dispose of it, since you need them to calculate depreciation and any gain or loss on the sale.¹³

1
U.S. Small Business Administration. Choose a Business Structure
2
U.S. Small Business Administration. Register Your Business
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Internal Revenue Service. About Form SS-4, Application for Employer Identification Number (EIN)
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Internal Revenue Service. Instructions for Form SS-4 (Rev. December 2025)
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Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)
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Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates
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Internal Revenue Service. Topic No. 554, Self-Employment Tax
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Internal Revenue Service. Form 1040-ES (2026), Estimated Tax for Individuals
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U.S. Small Business Administration. Get Business Insurance
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Internal Revenue Service. Publication 15 (2026), (Circular E), Employer’s Tax Guide
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USCIS. Instructions for Form I-9, Employment Eligibility Verification
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Internal Revenue Service. Topic No. 759, Form 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return
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Internal Revenue Service. How Long Should I Keep Records?