do sole proprietors need a business plan

Sole Proprietorship 101: The Easy Guide to Setting One Up

Published: October 17, 2022

For many, working for yourself sounds like a dream. If your goal is to own and operate your own business, you’ll need to set up a sole proprietorship.

Sole proprietors have complete control of their businesses — receiving all profits and managing their own liabilities. This guide explores how you can establish your own sole proprietorship.

• What’s a Sole Proprietor?

How to Start a Sole Proprietorship

Advantages of sole proprietorships, disadvantages of sole proprietorships, sole proprietorship business examples, position your new sole proprietorship for success.

Sole proprietorship is a type of business that is owned and operated by an individual (no partners involved) who pays personal income tax on business income.

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Sole proprietorships are not separate entities by law, so it’s considered one of the easiest types of businesses to start.

Unlike corporations or LLCs, you don’t have to register with the state. However, you must acquire appropriate permits and licenses to operate legally, and you are personally liable for debts, lawsuits, or taxes your company accrues.

Most businesses in the United States are sole proprietorships. Many entrepreneurs love sole proprietorships because of the ownership they have over business decisions and revenue. These businesses are also easy and cost-effective to set up.

So, how can you start a sole proprietorship? There’s an step-by-step guide for you below.

Before you start a business, however, it’s important to have a business plan. Here’s an easy-to-use business plan template to begin.

Now that you have the tools to create a business plan, let’s go over the definition of a sole proprietor and the types of sole proprietorships one would typically launch.

A sole proprietor is a person who has complete control over the revenue and operations of a business. In addition to taking home all profits, the sole proprietor is also responsible for all debts, lawsuits, and taxes their company accrues. If their business is sued, personal assets like their home, credit score, and savings are unprotected.

Types of Sole Proprietorships

A sole proprietor may operate as an independent contractor (a freelancer), a business owner, or a franchisee.

• Independent Contractor : An independent contractor is a self-employed sole proprietor who takes on projects on a contract basis with clients. They have the freedom to choose which clients they take on, but they are often subject to the processes and methods that the client requires.
• Business Owner: Business owners can also be self-employed sole proprietors. Unlike contractors, there is much more autonomy in how the work is completed for clients. The operation itself may even be more complex with employees and/or intellectual property.

Franchisee : Franchise owners may also be sole proprietors. The franchisee benefits from the guidance and business model of a larger brand. In exchange, royalties are paid to the franchisor.

If you want to launch a new business from scratch or you have a side hustle you want to convert into a full-time business, you should consider registering as a sole proprietorship. Here are some steps you can take to get started.

Step 1: Ensure a sole proprietorship is right for you.

First, is starting a sole proprietorship right for you? Or should you launch another type of business?

Choosing the right business structure is key to your venture’s success. As the SBA points out , “The business structure you choose influences everything from day-to-day operations, to taxes, to how much of your personal assets are at risk.”

Sole proprietorships, partnerships, limited liability companies (LLCs) , corporations, and cooperatives are just a few of the ways you can structure your business.

There are also notable differences in LLCs compared to S-corps . While sole proprietorships and LLCs are two of the most common business structures, there are key differences between them.

Sole Proprietorship vs. LLC

A limited liability corporation (LLC) provides the business owner liability protection and tax advantages. Meanwhile, sole proprietors bear personal liability for their businesses. Additionally, an LLC can be owned by investors, while a sole proprietorship is usually owned and managed by an individual.

Once you’ve determined a sole proprietorship is right for you and your business, it’s time to talk to the experts.

Step 2: Talk to your nearest Small Business Development Center.

Before you establish your sole proprietorship, reach out to your nearest Small Business Development Center . There, you can learn the steps your state, city, or county requires to operate your business legally.

Step 3: Choose a name.

Choosing a name is the fun part — researching whether or not it’s taken and trademarked is where things become difficult. Search the United States Patent and Trademark Office (USPTO) to learn whether your chosen name has been trademarked. If it hasn’t, consider filing your name with the USPTO to get a trademark on it, so no one else can operate under that name.

Step 4: Register your DBA.

As a sole proprietor, the legal name of your business is your personal name. However, if you want to operate under a different name, say, “Global Business Consulting Services,” you’d want to register a fictitious or "doing business as" name , also known as a DBA.

In many cases, you’re required to separate business and personal funds. A DBA is often necessary when opening a bank account or credit card for your business. Your state might also require follow-up steps after registration.

Most commonly, you’ll be required to publish the name you’ll be doing business under publicly — and then provide proof of publication to your local government.

A DBA also ensures no one else in your county is doing business under the same name. Bottom line? Register your DBA, and do it soon.

Step 5: Purchase a domain.

Once you’ve picked the perfect name, it’s time to go after a domain. For an easy client experience, your domain name should be the same as your business. Search to see if the domain you want is taken using these ICANN-accredited databases . Even if you’re not ready to build the website, reserve or buy your domain name so no one else can.

Step 6: Register for a business license.

Even sole proprietorships need a business license to operate, in most cities. Don’t skimp here. The fines for operating without a license can be steep. You might also need your business license to open a bank account — but more on that below.

Step 7: Check on other permits or licenses.

The fees associated with not having the correct licenses or permits can be debilitating for a young business. Be sure that you’ve gotten the correct federal licenses and permits and state licenses and permits . These might include:

• A health department permit for preparing or serving food
• A federal license for transporting animals
• A health and safety training for opening a daycare
• A certification exam to become a financial adviser
• A zoning permit to operate your business from home
• Registration with the state tax authority if you have employees or collect sales tax

Do the legwork upfront and find out what licenses and permits you need. The fees you’ll pay during this process are nothing compared to the fines you’ll pay if you haven’t filed the right paperwork.

Step 8: Get an employee identification number (EIN).

If you operate alone, you might not need an employee EIN and can operate and file taxes under your Social Security number. As soon as you hire an employee or set up a retirement plan, however, you must file for a federal employer identification number (EIN). It’s free and can be obtained online.

Step 9: Open a business bank account.

It’s important to keep personal and business expenses separate when running a sole proprietorship (especially if you get audited). Opening a business bank account ensures a certain level of protection for your business funds. This account also allows customers to pay with a credit card and make checks payable to your business. You can also build a good business credit history.

You want to be able to prove to the IRS that you’re running your business to make a profit. This ensures the losses you experience during the first few years will remain tax deductible.

It’s also wise to build a good credit history before starting your business. While credit cards can help you out in your company’s early days when cash flow is low, the interest adds up quickly and can easily become overwhelming.

A personal loan is often a better option. However, a good credit history is necessary for securing a loan of this type.

Step 10: Load up on insurance.

Because one of the biggest risks to starting a sole proprietorship is the liability, having adequate insurance is a must.

Consider property and liability coverage, auto insurance, health coverage, and disability coverage at the very least. This can get expensive, but it ensures you and your personal assets are protected from lawsuits and professional setbacks, should they arise.

Check out this SBA article to learn more about the coverage you need.

Step 11: Pay your taxes.

As a sole proprietor, you’ll pay income tax on all the income your business nets. File your sole proprietorship income taxes by using Schedule C on your Form 1040 . Then, add the income or losses your business incurred to the other income you record.

You can use any business losses to offset other sources of income, like a salary from your day job or a spouse. But be careful not to step into “ hobby business ” territory with the IRS. You must prove your business is not a hobby in order to lower your taxes. When your business becomes profitable, it might be time to file for corporate status or become an S corporation .

Remember, because you’re self-employed, your paychecks don’t have proper withholdings taken out at the time you’re paid. Instead, you can expect to pay quarterly estimated tax payments. You’ll then cover the difference or receive a refund for any shortage or overage come tax season.

Because of this, you should set aside money from each paycheck to cover those quarterly and annual expenses.

The main appeal of a sole proprietorship is the freedom and flexibility it provides for the owner. This is especially true of new entrepreneurship and people looking to scale their side hustle.

Whatever the situation is, sole proprietorship has many advantages. Here are a few common benefits.

1. Full Decision-making Authority

As a sole proprietor, you are fully responsible for making choices and decisions for your business. As opposed to a partnership or an LLC, you don’t need to consider the opinions of shareholders or legal partners. You are free to steer your business in any direction you think works best.

2. Easy to Set Up

A sole proprietorship is much easier to set up than other business forms.

As a sole proprietor, you don’t have to think about legal contracts with other business partners. You also don’t have to do other laborious tasks that other business enterprises require, like giving stock to shareholders or choosing a board of directors.

You do, however, have to get the necessary licenses and permits to legally run your business, such as sales tax permits and zoning permits.

The licenses and permits you’ll apply for depend on the type of business you want to run. Check with your local or state government to learn exactly which ones you’ll need.

3. Lower Up-front Cost

Starting a sole proprietorship is free for the most part. Of course, you’ll have to pay to register your business name, get your business domain, and get the necessary licenses or permits, but you won’t pay the $1,000 average cost of starting an LLC.

This is great if you’re working with a tight budget because you won’t have to invest a lot of money into the business before you begin operations.

4. Simple Tax and Lower Tax Rates

Sole proprietorships have fairly simple and straightforward tax requirements compared to other business entities.

In terms of tax filing, sole proprietorships are taxed as a pass-through business entity. This means that the business’ profits and losses are reported on your personal income tax return. So you don’t have to pay separate taxes for your business.

For example, if you use your own home as your business base, you won’t have to pay more money on space, utilities, and internet. This reduces your personal taxes. You might even get a tax refund when you file your personal tax return.

As a sole proprietorship, you can also take advantage of some tax deductions. For instance, the Tax Cuts and Jobs Act of 2017 allows sole proprietors to deduct 20% of their net income from their taxes.

Additionally, there’s no distinction between the owner and a sole proprietor. Therefore, the IRS does not require separate accounting records for the business — including balance sheets — as part of their tax return.

5. Full Control Over Revenue

As a sole proprietor, you’re in charge of all aspects of your business, including revenue. You decide how much you want to pay yourself and contractors (if you have any). You’ll also choose how much you want to pour back into the business.

As with all business models, sole proprietorships have disadvantages as well. Here are some of them:

1. Personal Assets Are at Risk

As a sole proprietor, you are responsible for the financial aspects of your business, including taxes, contractor wages, and any legal contingencies. What’s more, sole proprietorships don’t offer legal protection over your personal assets if you get into financial trouble.

This means that if your business is sued or you have to file for bankruptcy, the court has the right to seize your personal assets to cover these expenses. That includes your savings, home, cars, and other belongings.

Sure, insurance coverages can help with this, but they’re not foolproof.

2. Difficulty Raising Capital

While the initial costs of starting a sole proprietorship are low, raising capital to finance the business can be difficult. That’s because banks prefer to support incorporated businesses.

Banks consider the sole proprietorship model to be risky, as the owner’s personal assets are usually limited and can run out at any time. Financial institutions are usually reluctant to issue credit or give out loans to sole proprietors for fear that they won’t be able to repay them.

Sole proprietorships may also struggle to get buy-in from investors, as they’re not designed to have shareholders. Without loans and investments, it’s harder to take a sole proprietorship to the next level.

3. Self-employment Tax

As a sole proprietor, you are liable to pay a self-employment tax of 15.3% (12.4% in Social Security taxes and 2.9% for Medicare) on all income generated by the business.

While the 12.9% Social Security taxes are constant, the Medicare tax rate increases by 0.9% once you cross certain threshold levels. In the long run, this tax can become significant.

4. Perceived Lack of Professionalism

It’s not uncommon for potential investors and clients to view a sole proprietorship as less professional than a corporation or LLC. They may also be wary of doing business with an individual, as opposed to a separate legal business entity. You should keep this in mind if you might consider an LLC as an option for your business.

Sole proprietorships are a great choice for people who want to turn their side hustles into something a little more serious — and lucrative. A variety of businesses are operated as sole proprietorships.

Here are some common examples.

1. Web Developer

Web developers design websites for clients using web coding languages, such as HTML , CSS, JavaScript, PHP, and jQuery. An easier entry point into this field would be WordPress web development .

2. Digital Marketer

Digital marketers do anything from managing a brand’s social media accounts to improving a brand’s SEO . Be sure to specialize rather than offering all marketing services.

3. Virtual Assistant

Business owners are busy. They don’t want to hire an office assistant, especially because most tasks can be done online. Enter the virtual assistant.

As a sole proprietor running a virtual assistant business, you’d handle tasks such as bookkeeping and database entering for other business owners.

4. Daycare Operator

Daycare operators run small, affordable daycare facilities for parents who can’t afford expensive day schools or a dedicated nanny. A background education would be helpful before creating a daycare business.

You could, alternatively, found a dog daycare, or a daycare for the elderly.

5. Freelance Graphic Designer

Graphic designers create beautiful things: landing pages, brochures, flyers, and social media ads. As with digital marketing, you should specialize in either digital or print graphic design, and target certain industries that interest you. Creating a banner for a hair salon would be much different from creating one for an engineering firm. You’ll also need a graphic design portfolio.

6. IT Consultant or Computer Specialist

Have you ever run into IT problems? So do countless businesses. As an IT consultant running your own business, you would offer IT troubleshooting services to other companies. You’ll also resolve issues with both the company’s hardware and software solutions. Be open to traveling for this type of sole proprietor business.

7. Freelance Writer

As a freelance writer with a sole proprietorship, you would target brands that need content written for them. These may include nonfiction articles, news articles, blog posts, website pages, and social media ads. As with digital marketing and graphic design, consider specializing in one writing form.

8. Freelance Copy Editor

Freelance copy editors edit someone else’s writing for clarity, concision, and effectiveness. These editors proofread someone else’s work for errors. They also focus on the flow and cohesion of ideas.

You can either go into fiction or nonfiction copy editing. Alternatively, you can become a copy editor specifically for websites and blogs

9. Freelance Nonfiction Book Editor

Nonfiction book editors typically review highly technical or specialized material for flow, accuracy, and logic. These editors are different from other types because they exclusively specialize in manuscript-length works and have an advanced degree in the topic they specialize in.

10. Fitness Coach

Fitness coaching is a great choice if you have a passion for fitness. This type of sole proprietor typically targets gym goers — or those who’d like to start — to help them reach their fitness goals through a customized program. A degree in exercise science would be beneficial, as well as a certification in fitness coaching.

11. Housekeeper

Housekeepers clean houses with more thoroughness than a busy homeowner would. Tasks include mopping, sweeping, taking out the trash, washing dishes, and doing laundry. For optimal success as a sole proprietor, you should target a small geographical area to pitch your housekeeping services.

12. Landscaper

Landscapers mow lawns, trim bushes, check the soil’s health, and do everything related to backyard and front yard maintenance. You can offer something simple, such as lawn mowing, and slowly add more services as you gain more advanced land care knowledge.

13. Caterer

Like cooking? Then a catering sole proprietorship may be for you. Caterers cook large amounts of food for other people’s events and typically take care of delivery and setup. Instagram is a great platform to spread the word about your business.

An alternative sole proprietorship for those who enjoy cooking would be a baking business. You can either specialize in sweets or savory goods, or offer a mixture of both. While we often associate bakers with brick-and-mortar bakeries, you can operate this business out of your home and arrange local pickups.

15. Accountant

As a freelance accountant, you would work with small-business owners and audit their inflow and outflow of cash. Be sure to be proficient in at least one accounting software, such as QuickBooks or FreshBooks.

16. Tax Preparer

Tax preparers target individuals who find tax return documents inaccessible and difficult to fill out. This is one of the easiest sole proprietorships to launch, as there are no education requirements. A course in tax preparation is all you need.

17. Document Assistant

Document assistance is in a similar vein to tax preparation. You would help individuals fill out highly complicated forms — such as immigration applications, visa applications, and unemployment claims. You may also submit them on your client’s behalf.

Proficiency in another language would be beneficial, as those who need assistance are typically non-English speakers.

18. Resume and Cover Letter Writer

Resume and cover letter writers serve those who have a disparate collection of job descriptions, roles, and skills. They then turn the information into an effective resume. A background in writing would be beneficial if you plan to launch this type of sole proprietorship.

19. Event Planner

As a sole proprietor with an event planning business, you would handle all facets of the event planning process. That includes finding a venue, caterer, decorator, DJ, and event furniture supplier. You’ll typically handle part of the event setup as well. One particularly lucrative specialization is wedding planning.

20. Photographer

Freelance photographers take photos and video footage of virtually anything that clients want to capture. As with most business types on this list, you should specialize. A corporate photographer takes photos of a company’s staff. A wedding photographer takes photos of a wedding in an artful way. A maternity photographer takes maternity shoots. These three require different skill sets, so choose the one that best matches your background.

21. Standardized Test Tutor

As a standardized test tutor, you would coach high school and college students to improve their scores on the SAT, ACT, GRE, GMAT, or LSAT standardized tests. You should specialize in one or two tests.

Be sure to advertise the high score you received on your website. A background in education would be helpful.

22. Translator

You can start a translation business if you have advanced or native proficiency in a language other than English. Businesses, churches, and schools need translators to communicate with non-English-speaking clients or groups. You can start this type of business without a degree, but certification would be beneficial.

Starting a business as a sole proprietor is one of the biggest choices you’ll ever make. Though the risk is great, so is the reward. The best part is that you can start it on your own without leasing a building, hiring others, or requiring expensive training. With the steps shared in this post, you’ll build a strong foundation to ensure lasting success.

Editor’s note: This post was originally published in September 2018 and has been updated for comprehensiveness.

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How to Write a Business Plan for a Sole Proprietorship

Starting your own business as a sole proprietor is an exciting journey, offering unparalleled flexibility and control over your professional destiny. Yet, navigating this path successfully hinges on having a clear, well-structured business plan. This essential document serves as your roadmap, outlining your vision, strategy, and the practical steps needed to bring your business to life. Here’s how to craft a business plan that lays the groundwork for your sole proprietorship's success.

Key Components of a Sole Proprietorship Business Plan

A robust business plan for a sole proprietorship encompasses several critical sections:

Executive Summary: Your executive summary should succinctly encapsulate your business concept, target market, and competitive advantages. This section is crucial as it sets the stage for the detailed plan.

Company Description: Offer an in-depth overview of your business, including its structure, the products or services you provide, and your overarching goals. This section lays out the essence of your business and its purpose.

Market Analysis: Conduct a comprehensive analysis of your target audience and competitors. This research is essential for carving out your niche in the market and developing strategies to serve your customers effectively.

Organization and Management: Describe your business's organizational structure and any external support, such as freelancers or consultants, you plan to utilize. This section outlines how your business will operate and scale.

Marketing and Sales Strategy: Detail your approach for attracting and retaining customers. This includes your marketing channels, promotional tactics, and sales processes.

Service or Product Line: Clearly explain what you're offering, focusing on the benefits to your customers and why there's a demand for your product or service.

Financial Plan: Include comprehensive financial projections, such as revenue forecasts, cash flow statements, and a break-even analysis. This section is vital for understanding the financial viability and planning for profitability.

Tailoring Your Plan to a Sole Proprietorship

Emphasize Personal Branding: As a sole proprietor, your personal brand is intrinsically linked to your business. Your plan should reflect how your personal strengths and network contribute to your business's unique value.

Build in Flexibility: One of the strengths of a sole proprietorship is its ability to adapt quickly. Your business plan should include flexible strategies that allow you to pivot in response to market demands or challenges.

Utilizing Resources and Tools

In the journey of drafting a comprehensive business plan for your sole proprietorship, leveraging the right tools and resources can streamline the process and enhance the quality of your plan. Here are two crucial areas where the right resources can make a significant difference:

Recommended Tools and Software

The market is replete with tools and software designed to simplify the business planning process, from formulating your executive summary to projecting your financials. Utilizing these can save you time, provide structure, and even offer insights you might not have considered. Some top recommendations include:

Business Plan Software: Platforms like Plannit AI or Bizplan offer guided experiences through the planning process, with templates and financial forecasting tools that make it easier to create a professional plan.

Financial Modeling Tools: Software such as Excel or Google Sheets, with templates for cash flow statements, profit and loss forecasts, and break-even analysis, can help you craft detailed financial projections.

Market Research Resources: Tools like Statista or Google Trends can provide valuable data on market trends and consumer behavior, informing your market analysis section.

Project Management Apps: Applications like Trello or Asana can help you organize your business planning process, set deadlines, and track progress.

Seeking Professional Advice

While tools and software can streamline the planning process, the insight and guidance from experienced professionals can be invaluable. Consulting with financial advisors, business mentors, or industry experts can offer several benefits:

Financial Planning: A financial advisor can help you create realistic financial projections, advise on funding strategies, and identify potential financial pitfalls.

Business Strategy: Business mentors or consultants with experience in your industry can offer strategic advice, critique your business model, and suggest ways to enhance your competitive advantage.

Legal and Regulatory Guidance: For questions about the legal structure of your sole proprietorship, intellectual property, or regulatory compliance, consulting with a legal expert is essential.

By combining the power of the right tools and software with the wisdom and experience of professional advisors, you can create a business plan that not only lays a strong foundation for your sole proprietorship but also positions it for long-term success and growth.

Common Pitfalls to Avoid in Your Sole Proprietorship Business Plan

Creating a business plan for a sole proprietorship is a critical step in setting up your business for success. However, even the most diligent entrepreneurs can fall into common traps that potentially hinder their progress. Being aware of these pitfalls can help you navigate your planning process more effectively and set a solid foundation for your business growth. Here are key mistakes to avoid:

1. Overlooking Detailed Market Research

One of the most significant oversights in business planning is insufficient market research. Understanding your target market's needs, preferences, and behaviors is crucial for tailoring your products or services effectively. Moreover, a deep dive into competitor analysis allows you to identify gaps in the market you can exploit. Avoid making assumptions without data to back them up, and invest time in gathering insights that will inform your business strategies.

2. Underestimating Financial Needs

Many sole proprietors underestimate the capital required to start and sustain their business until it becomes profitable. This can lead to cash flow problems, which are a common reason for business failure. When drafting your financial plan, include detailed projections for startup costs, operating expenses, and a buffer for unexpected costs. It's better to overestimate your financial needs and have surplus funds than to find yourself in a financial bind.

3. Neglecting a Marketing and Sales Strategy

Assuming that your product or service will sell itself is a critical mistake. A comprehensive marketing and sales strategy is essential for attracting and retaining customers. This strategy should outline your target market, marketing channels, promotional tactics, and sales process. Without a clear plan for how you will reach your customers and convince them to buy from you, even the best business ideas can flounder.

4. Ignoring the Need for Flexibility and Adaptability

The business landscape is constantly changing, and what works today may not work tomorrow. Your business plan should not be so rigid that it cannot accommodate changes in the market, customer preferences, or new opportunities. Incorporate flexibility into your plan, allowing you to pivot or adjust your strategies as necessary to respond to unforeseen challenges or take advantage of new trends.

5. Skipping Professional Advice

Even if you're a seasoned expert in your field, seeking advice from financial advisors, legal consultants, or business mentors can provide valuable insights you might have missed. These professionals can help you identify potential flaws in your plan and offer solutions you hadn't considered. Skipping this step could mean overlooking crucial aspects of your business that could lead to problems down the line.

A well-crafted business plan is your roadmap to success as a sole proprietor, but it's essential to be mindful of common pitfalls that can derail your efforts. By conducting thorough market research, accurately estimating your financial needs, developing a solid marketing and sales strategy, maintaining flexibility, and seeking professional advice, you can avoid these mistakes and build a strong foundation for your business. Remember, the goal is not just to start a business but to sustain and grow it into a successful venture.

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How To Start a Sole Proprietorship: Your Step-by-Step Guide

Starting a sole proprietorship can be a clear way to get your business idea up and running. Learn how to set up a sole proprietorship.

One of the most common and straightforward ways of starting a business is to establish a sole proprietorship. Although it’s often thrilling, becoming a small business owner also poses real challenges—even for entrepreneurs who use this basic type of business structure. Learn about sole proprietorships and the various types available, and get a step-by-step guide on how to start one.

What is a sole proprietorship?

A sole proprietorship is a business owned by an individual, known as a sole proprietor, who operates the business alone and typically in their own legal name. It is the most straightforward business structure, with complete control in the hands of the owner. For this reason, the business and the owner are considered a single entity, without separation for tax and legal purposes. This is in contrast to other business structures, such as corporations or limited liability companies (LLCs) .

When a freelancer strikes out on their own—whether they’re a graphic designer, a business consultant, a writer, etc.—the default designation for income tax is as a sole proprietorship. A sole proprietor also can make and sell products, though usually when a business scales up it chooses to operate as a corporation. This establishes a separation between the finances and legal obligations of the company and its owner or owners.

Types of sole proprietorships

Solo business owners have several options for how to structure a sole proprietorship. Choosing the right one depends largely on the nature of your business:

Unincorporated sole proprietorship

This is the simplest sole proprietorship, where the business operates under the owner’s name. It requires minimal paperwork and is the easiest to set up. The owner is personally liable for all business debts and obligations.

Fictitious business name sole proprietorship

When an owner wants to operate their sole proprietorship under a business name different from their own, they must register a fictitious name. It is sometimes known as a “doing business as,” or DBA, name . This type of sole proprietorship provides a bit of anonymity and allows for branding, but like an unincorporated sole proprietorship, the owner remains personally liable for all business obligations.

Professional sole proprietorship

Accountants, consultants, doctors, lawyers, and other professionals sometimes practice under a professional sole proprietorship. This structure requires compliance with specific licensing and regulatory guidelines related to the profession while retaining the simplicity of a sole proprietorship.

How to start a sole proprietorship

• Start with a business idea
• Assess business structure needs and tax considerations
• Choose a DBA, if needed
• Obtain necessary business licenses and permits
• Open a business bank account
• Obtain a federal employer identification number (EIN)
• Purchase business insurance
• Conduct health and safety training
• Manage your finances

Starting a sole proprietorship requires having a plan, putting it into motion, and complying with relevant laws and tax obligations. The following steps can help:

1. Start with a business idea

Refine your business idea and conduct thorough market research. Understand your target audience and competition, and define your business’s unique value proposition .

2. Assess business structure needs and tax considerations

Determine why a sole proprietorship might be right for your business. Look into tax implications, including personal income tax rates for self-employed workers , which can vary depending on the state or city where you live.

3. Choose a DBA, if needed

If you’re not operating under your own name, select a fictitious name that is memorable and complies with legal requirements in the state where your sole proprietorship is based. Ensure your name is unique and doesn’t infringe on any active trademarks. Register your DBA in your state of incorporation, usually with your local county clerk’s office.

4. Obtain necessary business licenses and permits

Check with your state and local government offices—such as the Secretary of State or office of incorporation—to identify any business licenses or permits you may need. You may need a permit from the local health department, a permit to collect sales tax, even a permit to occupy office or work space. Ensuring regulatory requirements is crucial. This can help prevent headaches down the road, including having your business fined or shut down by regulators.

5. Open a business bank account

It’s helpful to keep your business transactions separate from your personal finances, even when operating a sole proprietorship. Opening a dedicated business bank account simplifies accounting by letting you more readily track business costs. This can help you or your accountant identify which expenses are eligible for deduction from your income taxes.

6. Obtain a federal employer identification number (EIN)

Although not always required for sole proprietors (who are often identified by their Social Security numbers for tax purposes), getting an EIN can have benefits. It may be necessary if you plan to open accounts with certain banks, accept credit card payments, or hire employees. An EIN can also act as an extra layer of security against identity theft.

7. Purchase business insurance

Consider buying business insurance to protect your business and personal assets. Policies can cover general liability, property loss or damage, or provide other protection depending on your industry or equipment needs.

8. Conduct health and safety training

In some cases, you may need to train employees (if you have them), and undergo health and safety training yourself. You also may need to research and adhere to certain industry-specific standards for health and safety.

9. Manage your finances

Keep detailed records of business expenses, income, and receipts. Consider consulting a tax professional to maximize your tax deductions because taxes on self-employed individuals can be high in some states.

Advantages of a sole proprietorship

Running a sole proprietorship comes with several advantages, largely because of the structure’s relative simplicity and ease of setup. This makes it an attractive option for small entrepreneurs running lean operations. Here are a few of the advantages: 

Complete control

As the sole owner, you have total control over all of the sole proprietorship’s business decisions and activities. Without other business partners, who may have ideas that differ from your own, you can implement your personal vision.

Simplified taxation

Sole proprietors report business income on their personal tax return. This simplicity can save time and reduce accounting costs compared with incorporated businesses, such as C corporations (C corps) or LLCs.

Direct access to business profits

Unlike other business entities, where partners or shareholders can claim a share of the earnings, sole proprietors receive all the profits the business generates.

Disadvantages of a sole proprietorship

The simplicity of the sole proprietorship also has some drawbacks, including: 

Personal liability

Perhaps the most significant disadvantage of running a sole proprietorship is the owner is personally liable for all business debts and legal obligations. This means, if the business owes money, faces lawsuits, or encounters financial difficulties, both the business assets and the owner’s personal assets are at risk. This includes the owner’s personal savings, home, and other property.

Unlike more complex business structures that provide legal separation between a business and its owners, the sole proprietor bears full personal responsibility for the business’s success or failure.

Limited financial resources

Sole proprietors may encounter more difficulty raising capital from banks or outside investors compared to larger business structures like corporations. This can hinder the ability to expand or undertake larger projects. The reliance on personal savings or small loans can also strain personal finances, especially during a business’s early stages.

Limited expertise and skill pool

A sole proprietorship is limited to the skills and knowledge of the owner, which may prove inadequate to various business challenges, from accounting to marketing. In larger, more complex business structures or multiple partners or managers can bring different perspectives, experiences, and skills to the table.

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How to start a sole proprietorship FAQ

How do i establish myself as a sole proprietor.

If you begin work as a sole proprietor subject to Internal Revenue Service (IRS) tax forms like a Form W-9 , you will be designated an unincorporated sole proprietor by default. To establish yourself as any other kind of sole proprietor, you must choose a business name, register it if you use a DBA, obtain necessary licenses and permits, set up a dedicated business banking account, and pay taxes (including the self-employment tax ).

How much does it cost to start a sole proprietorship?

The cost of setting up a sole proprietorship varies. It includes expenses such as business registration fees (if applicable), obtaining necessary licenses and permits, potential fees for legal advice, and the cost of opening a business bank account. These fees can range from about $50 to $500, depending on your business location and specific compliance requirements.

What qualifies you as a sole proprietor?

To qualify as a sole proprietor, you must be the single owner and operator of a business, personally managing its day-to-day affairs and assuming all responsibility for its financial and legal obligations. There’s no formal registration for an unincorporated sole proprietorship, making it a straightforward choice for individual entrepreneurs who want to run their own business.

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How to Write a Business Plan for a Sole Proprietorship

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• Business Planning & Strategy
• Write a Business Plan
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• Preparing a Three-Year Business Plan
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A business plan for a sole proprietorship is just like any other business plan. The main difference in business plans, in general, is the purpose. If you are writing a plan to organize your existing small company, focus on how your company operates and your goals for the future. If you will use it to obtain funding, your focus should be how you will make profits by supplying a commercial need.

Research Your Market

Start your research by describing your target or best customers by gender, age, income level, buying habits and residential location. Then look at your competition. Compare your company to your competition in terms of product offerings, service, prices, marketing, brand image and profitability. This gives you information for establishing the future direction you want your company to take, goals for expansion, product lines, service improvements, marketing to increase market share and ways to increase profitability. If you are a startup business, researching your market helps you develop your business idea, initiate good practices from the start and position your launch to attract the attention of your target market. It also gives you an argument that your company can fill a niche that will result in profits, which is important if you are going after funding.

Sole Proprietorship

There are special problems faced by a sole proprietorship operated by one person. The biggest problem is that you can't do everything. While examining your market, look for outside services that are geared to helping you compete with larger companies. These might be telephone answering services and business center offices that supply office space, office machines, administrative services and conference rooms. The Internet can provide inexpensive, simple-to-use marketing services and other outsourced services to expand your business reach. These are important considerations for the operations section of your business plan.

Develop Your Idea

Use your market research to solidify your vision for your company. Write a one or two sentence mission statement that addresses what you do, for whom, when, where, why and how. Then build on that. Establish in detail how the company operates, your suppliers, sales agents, cost of goods, price points, marketing strategy and growth plans. The more detailed you express this vision, the more likely you will see holes in your plan, which is one of the benefits of writing a business plan; it enables you to solve problems before you encounter them.

Research Your Costs

Make a list of every expense you encounter including rent, employees, travel, legal services, business licensing, insurance, inventory, sales costs, marketing costs and delivery costs. Business plan software is a good source of spreadsheet programs that allow you to plug in these costs to see what kind of revenues you must generate for profitability. These programs also print out a good presentation of your financial projections for use in obtaining funding.

Write the Plan

Your business plan should be shorter than 50 pages and should include the following sections: executive summary, which is written last; description of industry, including how you fit in; business model, describing your products and services; target market, describing who will buy from you and why; marketing model, describing how you will reach your target market; revenue model, estimating revenues and discussing how you will achieve those estimates; management, listing the bios and skills your managers bring to the company as well as your outside advisory board; and your financial projections, which consist of spreadsheets including a profit and loss statement, sales projections, personnel projections, cash flow and balance sheet. Include a discussion of how you arrived at these financial projections and the assumptions you used.

• SBA.gov: How to Write a Business Plan
• Entrepreneur: An Introduction to Business Plans

Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.

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Start » startup, how to choose the right business entity: sole proprietorship.

A sole proprietorship is the most common U.S. legal business structure, with minimal startup costs and various tax perks.

The Internal Revenue Service (IRS) requires every business to classify itself as a specific type of legal entity. These entities come in five forms – partnership, corporation, limited liability company (LLC), S corporation and sole proprietorship – and each comes with its own legal and tax considerations.

Declaring your business as a sole proprietorship is easy to set up, and if you are working as a consultant, freelancer or other singular business, you may already be operating as one without realizing it.

If you're interested in establishing a sole proprietorship (or if you're already running one), here's a basic overview of what this legal business structure entails.

What is a sole proprietorship?

A sole proprietorship is the simplest and most common business structure in the United States. Sole proprietorships are run by a single individual who is responsible for all business assets, profits and liabilities.

Because this type of entity is so easy to form, administrative startup costs are minimal. The law does even not require you to set up a formal structure before launching your business. If you are the only owner and are operating under your legal name (not under a DBA name), you are automatically considered a sole proprietor by the IRS. The only legal expenses that may apply are for any licenses and permits you may need, depending on your industry.

[Read: A Guide to Business Licenses and Permits ]

Pros and cons of sole proprietorship

Two of the many benefits of a sole proprietorship include:

• Full control over the business . Since you are the sole owner, you make all of the business decisions.
• Simple tax preparation . Known as pass-through taxation, your sole proprietorship does not need to be taxed separately from your Social Security number, which means that you simply need to report your business profits and losses to the IRS on a Schedule C form and Form 1040 and file your taxes as normal. As an added bonus, sole proprietor tax rates are the lowest among all business structures.

Of course, some of these perks can also lead to potential disadvantages, including:

• Full financial responsibility . As the sole owner and decision maker, you alone are liable for any financial losses and debts that may occur within your business.
• Difficulty with finding investors . The SBA also notes that it's difficult for sole proprietors to raise money. Banks view sole proprietors as particularly risky since the business's success and failure depends on a single person. You're also unable to sell stocks in a sole proprietorship, which may limit your opportunities to bring on investors .

When your business is just starting out and plans are to remain as a business of one, sole proprietorship makes sense.

Who should operate as a sole proprietor?

There are certain types of businesses that are well-suited for sole proprietorship status:

• Business consultants and speakers . Professionals in this space may take on a few gigs a year, or operate as a full-time business.
• Freelancers. Photographers, copywriters, web developers and more are typically a business of one contracted on a per-project basis by their clients.
• Home health care specialists. Home care assistants typically work as contractors and provide services to clients in their homes.
• Professional cleaning . Residential and commercial cleaning can easily be done as a side job or a full-time business.
• Landscapers . These businesses often begin with one person who does all the work. As demand increases, the sole proprietor may hire employees or outside contractors for assistance.

Businesses like these are ideal sole proprietorships because they are inexpensive to start and typically don’t need investors or financing to cover overhead expenses like storefronts or specialized equipment. They are also primarily built on the owner's personal reputation and skill set.

Is a sole proprietorship right for your business?

When your business is just starting out and plans are to remain as a business of one, sole proprietorship makes sense. If you have big growth plans for your business, you may wish to consider a different legal structure, since sole proprietorships can come with financial, business and legal risks. However, if you plan to keep your business small, you can operate as a sole proprietorship indefinitely.

[Read: Getting Ready to Launch? How to Choose the Right Business Structure ]

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What Is a Sole Proprietorship?

• Getting Started

Sole Proprietorship vs. LLC vs. Partnership

• Pros and Cons

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Investopedia / Theresa Chiechi

A sole proprietorship is an unincorporated business with one owner. There is no legal separation between the company and the owner, who receives all profits but is liable for all debts and losses. A sole proprietorship is the easiest type to establish and a popular choice for small businesses , individual contractors, and consultants. Most small businesses start as sole proprietorships and either stay that way or expand and transition to a limited liability entity or corporation .

Key Takeaways

• A sole proprietorship is an unincorporated business with only one owner who pays personal income tax on profits earned.
• Sole proprietorships are easy to establish and popular with small business owners and contractors.
• Most small businesses start as sole proprietorships and may transition to a limited liability entity or corporation as the company grows.

Establishing a Sole Proprietorship

The easiest way to start a one-owner business is through a sole proprietorship. The debts of the sole proprietorship are also the debts of the owner. However, all profits flow directly to the business owner. There are certain steps individuals should take to get started including:

• Some states require that individuals apply for business or occupancy licenses and permits.
• States may also require businesses to file a "Doing Business As name" or operate under an assumed name, usually the sole proprietor.
• Apply for and obtain an Employer Identification Number (EIN) for employees or to file tax returns. Some sole proprietors can use their own Social Security Number (SSN). Owners may want to check with a tax advisor to determine which works best.
• To sell taxable products, businesses must register for a sales tax license with their state.

33.3 Million

The number of small businesses in the United States in 2023. Together, these businesses employed 61.6 million people across the country.

A sole proprietorship is very different from a corporation, a limited liability company (LLC) , or a limited liability partnership (LLP) , in that no separate legal entity is created. As a result, the business owner of a sole proprietorship is not exempt from liabilities incurred by the entity.

When a sole proprietor seeks to incorporate a business, the owner usually restructures it into an LLC . For this to work, the owner must first determine that the company name is available. If the desired name is free, articles of organization must be filed with the state office where the business will be based. The business owner must create an LLC operating agreement defining the business structure. Finally, the new company must obtain an EIN from the IRS.

Sabrina Jiang © Investopedia 2020

Advantages and Disadvantages

A sole proprietorship requires a limited amount of paperwork to get started. The tax process is simpler because an employer identification number (EIN) from the Internal Revenue Service (IRS) is not required and owners can use their Social Security number (SSN) to pay taxes. Income generated from a pass-through business is only subject to a single layer of income tax and, in some cases, may be eligible for a 20% tax deduction until 2026.

An important downside of a sole proprietorship is that it provides no liability protection to the owner. By contrast, an LLC separates business and personal assets and the owner is protected against creditors seizing their assets, such as their home. This unlimited liability goes beyond the business entity to the owners themselves. Sole proprietorships must rely on standard funding like bank loans or lines of credit. Banks may view a new business with a small balance sheet as a high-risk borrower.

No need to obtain an EIN from the IRS

Quick and easy setup compared with other business structures

Pass-through tax advantage

Personal assets are not separated from business assets

Difficulty in raising capital

Owners assume all debt and tax liability

The Tax Cuts and Jobs Act (TCJA) of 2017 added a tax break for pass-through entities that essentially allows them to deduct up to 20% of qualified business income. That deduction can result in huge savings and runs until Jan. 1, 2026—unless extended by Congress.

The owner of a sole proprietorship pays personal income tax on profits earned from the business. Sole proprietors report their income and expenses on their tax returns and pay income and self-employment taxes on profits. Tax forms include:

What Is an Example of a Sole Proprietorship?

Independent photographers, small landscaping companies, freelance writers, or personal trainers are examples of sole proprietorship businesses.

Is a Sole Proprietorship the Same As Being Self-Employed?

A sole proprietor owns and operates an unincorporated business independent of partners and is solely responsible for the liabilities and tax implications of the business. The sole proprietor is also considered self-employed, however, "self-employed" is a broader term that can be applied to those who work as independent contractors, writers, tradespeople, lawyers, salespeople, and insurance agents. Self-employed individuals generally file an annual income tax return and pay estimated taxes quarterly.

Should Individuals Choose Limited Liability Company or a Sole Proprietorship?

A sole proprietorship is best suited to small businesses with low risk and low profits. Generally, these businesses don’t have a wide range of customers but rather a small, dedicated group. Sole proprietorships often start as hobbies that grow into a business. The reasons to start a limited liability company (LLC) are that the business entails some liability risks , has the potential for large profits and a large customer base, and is positioned to benefit from certain tax structures.

A sole proprietorship is a straightforward way for an individual to start a business. It does not require registering with a state authority for most situations and does not require obtaining an EIN from the IRS. The benefits of simplicity are accompanied by some drawbacks, including all liabilities passed through from the business to the individual and obtaining funding.

Internal Revenue Service. “ Form SS-4 & Employer Identification Number (EIN) 1 .”

U.S. Small Business Administration Office of Advocacy. “ 2023 Small Business Profile ,” Page 1

Internal Revenue Service. “ Topic No. 407 Business Income .”

Internal Revenue Service. “ Do You Need a New EIN? ”

Internal Revenue Service. “ Qualified Business Income Deduction .”

Internal Revenue Service. “ Sole Proprietorships .”

Internal Revenue Service. " Self-Employed Individuals Tax Center ."

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What is a sole proprietorship? Definition, pros and cons

Mehdi Punjwani

Sierra Campbell

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Published 4:52 p.m. UTC Feb. 9, 2024

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Wasana Kunpol, Getty Images

The number of Americans working for themselves has been on the rise, growing 89% between 2020 and 2023. As such, interest in independent business structures has also been growing – with many looking towards sole proprietorship as a way of legitimizing their freelancing gig or side hustle. 

While not the only option – some may opt to start their own business as a corporation or limited liability company (LLC) – choosing a sole proprietorship offers a number of benefits worth considering. Here’s what you need to know about sole proprietorships, how they work and the pros and cons you need to consider.

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What is a sole proprietorship?

A sole proprietorship is a business that is owned and operated by an individual person – it’s one of the easiest and most common types of business for individuals to set up. Over 70% of U.S. businesses are owned by sole proprietors or sole traders.

With sole proprietorship, taxes on the business’s profits are paid as part of the owner’s personal income. The individual owner also accepts personal liability for the business rather than the company itself as a separate entity. Examples of sole proprietorships include freelance photographers, personal trainers, accountants, financial planners and housekeepers.

Sole proprietorship advantages and disadvantages

To help you decide if a sole proprietorship is the right avenue for your small business, you should consider the advantages and disadvantages involved – we’ve broken them down:

Sole proprietorship advantages

The main advantages of setting up a sole proprietorship , as opposed to an LLC , corporation or partnership , are the following:

• Easy to set up. Setting up a sole proprietorship is straightforward – in fact, aside from basic licenses and permits, you won’t have any major legal considerations. This makes the structure much easier to set up compared to LLCs or corporations, which often require legal contracts and a range of forms. Not all business types need licenses or permits, so you should check local and state regulations to understand what you’ll be required to have before starting a business.
• Fewer fees. As the process is simpler, you’ll find there are fewer up-front costs involved in setting up your sole proprietorship compared to other models. For example, the costs involved in setting up an LLC can be in the thousands of dollars when you consider filing fees, DBA fees, license fees and annual report fees.
• Full control over business and profits. An advantage in owning and operating your own business, whether a sole proprietorship or an LLC, is that you’ll have full control, and you won’t need to answer to shareholders. You’ll also keep all profits generated by the business.
• Fewer regulations. Sole proprietorships face fewer regulations than LLCs and corporations, mostly concerned with tax, product standards and the legality of goods.
• Flexibility. Finally, it’s important to remember that starting as a sole proprietorship doesn’t make it a permanent decision – you can always turn your business into an LLC when you feel the time is right.

Sole proprietorship disadvantages

However, as with any kind of business, there are certain risks or factors to be aware of:

• Liability. The main negative aspect to consider with setting up a sole proprietorship is you’ll need to assume liability for the business. This means you’ll be exposed to the risk of lawsuits or debts — as such, your own personal assets will also be at risk.
• Self-employment taxes. You’ll also need to pay self-employment taxes on all of your earnings, which can be time-consuming.
• Funding and support. While you’ll have full control over your business and profits, many sole proprietorships are home-based side gigs — often funded by personal savings. You won’t have the support structure of a full business or shareholder funding.

How to start a sole proprietorship

The easiest of all business models to set up, you’ll technically automatically become a sole proprietor as soon as you start your business. However, depending on the type of business you conduct, you may want or need to do the following.

Choose and register your business name

You might want to conduct business under your own legal name, in which case there is no need to take any action. However, if you want to choose a separate business name , sometimes referred to as a DBA or “doing business as,” you’ll need to register it at either the local or state level, depending on the state you’re in. 

You may also want to purchase a domain name for your business website.

File for licenses and permits

The licenses and permits you’ll need to operate, such as operating licenses or seller’s permits, will also depend on your business type and the state you’re in.

You’ll need to file for an employer identification number (EIN) through the IRS if you have employees or if you will need to file excise or pension plan tax returns. If not, you can use your Social Security number.

When you set up a sole proprietorship, you’ll be required to pay tax on your income by using Schedule C on Form 1040.

Purchase business insurance

As a result of the liability issues discussed previously, you may want to take out business insurance to cover yourself against potential legal costs you might face.

Open a business bank account

While not strictly necessary, you might consider opening a business bank account to separate and organize your finances.

Sole proprietorship alternative business structures

Starting a sole proprietorship isn’t the only option you’ll have when creating your own business – you could also choose to start an LLC, a corporation or a partnership. Here’s a quick comparison:

When deciding on a business structure, how much liability you want to assume, along with tax considerations, are going to be two major considerations. We dive more in-depth into the pros and cons of other types of business ownership here .

Sole proprietorship vs. LLC

The most significant difference between sole proprietorships and LLCs is that when you form an LLC, you’ll have limited liability, so your assets won’t be at risk in the event of a lawsuit or debt collection. 

However, setting up an LLC carries with it a number of extra fees and regulatory requirements compared to a sole proprietorship, which can be more of a hassle to manage. 

Sole proprietorship vs. corporation

Corporations are more often appropriate business models for larger companies with multiple owners. If you run a corporation, you must elect a Board of Directors and Corporate Officers — though for smaller businesses, these will generally come down to one person, the owner. The owner is also often classed as an employee of the business, which isn’t the case in sole proprietorships or LLCs — this has tax, insurance and legal implications.

Setting up a corporation requires paying more fees and meeting more regulatory standards. However, corporations also have stock, something you can offer investors or important members of the company – more easily done than with an LLC or sole proprietorship. 

Sole proprietorship vs. partnership

Lastly a partnership is what you’d set up if your small business had two or more owners who contribute to the business, manage it and share in its profits, without incorporating or setting up an LLC. In most senses, it is effectively the same as a sole proprietorship, except with two or more owners. 

When should you choose a sole proprietorship?

A sole proprietorship is a good choice for individuals starting out with their small business, with low up-front costs and simplicity of setup. However, as it doesn’t offer the owner limited liability, it’s better for low-risk businesses that aren’t likely to face many legal or debt-related issues.

It’s especially useful as an alternative to LLCs and corporations if you’re looking for full control over your business while facing minimal regulatory and compliance barriers. 

Frequently asked questions (FAQs)

No, sole proprietorships and LLCs are two separate entities with different benefits, drawbacks and legal classifications. LLCs offer liability protection and can have multiple owners, neither of which apply to sole proprietorships.

Yes, a sole proprietorship can have employees, but this is likely to require extra tax and insurance considerations.

Any income made by a sole proprietorship is taxed as part of the owner’s own personal income.

Sole proprietorships only require an EIN if they have employees or pay excise duty.

Whether or not you need to register as a sole proprietorship depends on your state, but in most cases, it will be necessary if you’re using a DBA or otherwise for tax purposes.

Blueprint is an independent publisher and comparison service, not an investment advisor. The information provided is for educational purposes only and we encourage you to seek personalized advice from qualified professionals regarding specific financial decisions. Past performance is not indicative of future results.

Blueprint has an advertiser disclosure policy . The opinions, analyses, reviews or recommendations expressed in this article are those of the Blueprint editorial staff alone. Blueprint adheres to strict editorial integrity standards. The information is accurate as of the publish date, but always check the provider’s website for the most current information.

Mehdi is a writer and editor with many years of personal finance expertise under his belt. He's a spirited money-saver, with a passion for making personal finance accessible and manageable. When he isn't writing, Mehdi likes to read about history and travel, hike along coastlines and in forests, and watch his beloved team Manchester United underperform.

Sierra Campbell is a small business editor for USA Today Blueprint. She specializes in writing, editing and fact-checking content centered around helping businesses. She has worked as a digital content and show producer for several local TV stations, an editor for U.S. News & World Report and a freelance writer and editor for many companies. Sierra prides herself in delivering accurate and up-to-date information to readers. Her expertise includes credit card processing companies, e-commerce platforms, payroll software, accounting software and virtual private networks (VPNs). She also owns Editing by Sierra, where she offers editing services to writers of all backgrounds, including self-published and traditionally published authors.

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Creating a Business Plan for Your Sole Proprietorship

You have a brilliant business idea that's ready to take flight. But as a sole proprietor, you face unique challenges when it comes to business planning. It's not about following a cookie-cutter template; it's about finding a solution that fits your needs. You're not working with a team of experts; you are the expert.

We shall speak about various aspects of product-market fit, operations, finance, operations, and many other details that must be documented. Here are a few things to remember while crafting a business plan for sole proprietorship.

Collectively, these will be the foundation and vision documents to run the business. You can use it to raise funds or pitch to potential business partnerships. 

Let’s evaluate the importance and contents of each section.

Business Plan: Executive Summary

The first and foremost step for creating a sole proprietorship business plan is to list down every aspect of the business to create a blueprint. It must include the executive summary of the business from the first step to the last, which you can use as a checklist to start successful operations. 

An executive summary of the business includes a brief overview of your business idea, including its name, location, and your products or services. It’ll also have details about your target customers, unique value propositions, and financial projections. Furthermore, the summary must also include the desired online and offline marketing and promotion channels. You can also include the required capital needs and the channels for raising the required capital.

Market Analysis 

Once you have created the executive business summary, the next step is to execute extensive market research to ensure your business’s presence is noted and successful. It is more than likely for the current market to have operational businesses like yours already, which may offer you crucial data on market trends. You can analyze your direct competitors, understand how they market and promote their business, and set a demographic for your target customers. 

Once you have identified your target customers and demographics, you can create multiple sub-business plans to communicate how your products and service offerings will fulfill their needs. Furthermore, you can execute a SWOT analysis to assess your business's strengths, weaknesses, opportunities, and threats. 

Marketing and Sales Strategy

Creating a business plan and streamlining the products or services are vital steps in creating a business plan but must be followed by a comprehensive marketing and sales strategy. A marketing plan includes strategies to create an extensive online and offline business presence. Outline your marketing plan, including your brand, pricing strategy, and promotional efforts, with the overall budget you have in mind for marketing. 

Once you have the marketing plan and goals listed, follow them with comprehensive sales strategies. Analyze the sales target by listing the number of products or services you want to sell in a specific period. Furthermore, include information about the sales channels and the pricing policy, which will help you streamline your profit margin in every sale. 

Product or Service Line

Your business will be as successful as the quality of products or services you offer to the customers. The products and services must align with the chosen demographic and should fulfill their needs. However, it is equally important to communicate relevant information about the features, benefits, and pricing of the products or services to the customers. The information should also include your product/service life cycle and any future development or expansion plans. 

The product or service line you have created must be flexible enough to incorporate customer feedback or change to fit the dynamic market demand better. For example, suppose more customers are seeking to buy the category of products or services you offer online. In that case, your product or service line must follow a process to enlist them online and execute the sales. 

Organization and Management

In a sole proprietorship, you will be the sole owner and have full control over all the aspects of the business. However, with numerous steps in turning your business idea into an operational business, your business plan must have ideal strategies for organizing and managing all the activities from start to finish. For example, if you need raw materials daily, streamline the supply chain and the cost price range for the raw materials. 

Depending on the nature of the business, you may find the management overwhelming for a single individual. Sole proprietorships include the management of various aspects such as accounting, taxation, bookkeeping, payments, etc. Hence, you must analyze your skills and seek the assistance of experts for better management. The business plan should include information about the experts. 

Operational Plan

Day-to-day operations are crucial for a sole proprietorship business to fulfill customer orders promptly and create goodwill. The operational plan must include factors related to your business’s day-to-day operations to ensure that the business runs smoothly. The plan must include the operational location, the facilities to manufacture/store products or services, and the required equipment. 

Furthermore, your business may need raw materials (and their suppliers). The operational plan must include information about the suppliers to outline your production or service delivery process. The operational business plan must provide details if you want to hire other employees to help in the operations. 

Financial Projections

Finance is a vital aspect of a business. It includes effectively recording all transactions in applicable ledgers such as balance sheets, profit and loss accounts, cash flow statements, etc. Furthermore, the financial aspect of the sole proprietorship also includes creating financial projections related to monthly, quarterly, and annual sales and revenue. 

Furthermore, you should detail your revenue and profit goals and outline your pricing strategy. Don’t forget to estimate expenditures, revenues, and profit targets for specific sales. 

The general practice is to create projections for three scenarios, bad, good, and best, to be prepared irrespective of how market conditions change. If you’re making certain assumptions like cost of capital, growth rate, etc, please note them, too.

The appendix in a business plan is a specialized section that includes anything that the sole proprietor feels must be additionally included. These may include any registration, legal, regulatory, and compliance documents. Furthermore, you may also include the resumes of all the applicants for employees you want to hire to analyze them at a specific time in the future and hire the ideal ones. 

India has various Small Business Development Centers offering aspiring entrepreneurs guidance and resources. These centers often provide templates and workshops for creating business plans. You can also visit the websites of the Micro, Small, and Medium Enterprises (MSME) to get real-time updates about the regulatory and administrative compliance for sole proprietorships. Various online platforms, such as Skydo or MyonlineCA , offer business plan templates tailored to the Indian market. You can consult their expert CAs to understand everything about a sole proprietorship business and to create an ideal business plan detailing all the business growth opportunities. 

Conclusion 

Creating a business plan for your sole proprietorship is crucial in setting clear objectives, strategies, and expectations for your venture. While sole proprietorships are relatively simple, a well-thought-out business plan can help you clarify your vision, secure funding (if needed), and guide your business toward success. 

Remember that a business plan should be tailored to your business idea, goals, and growth opportunities. While these resources can provide valuable guidance, it's important to customize your plan based on your unique circumstances and market research. Additionally, regularly update your business plan to reflect business and market conditions changes.

Q1. How can a sole proprietor ensure the quality and adaptability of their product or service line?

Ans: Communicate essential details about features, benefits, pricing, and product/service life cycle. Stay flexible and responsive to market demands and customer feedback.

Q2. What role does the marketing and sales strategy play in a sole proprietorship business plan, and what key components should be outlined?

Ans: The marketing and sales strategy is vital for creating a strong online and offline business presence. This plan should include details on branding, pricing strategy, promotional efforts, and the overall marketing budget. Additionally, the sales strategy should outline sales targets, channels, and pricing policies to ensure profitability. Together, they form a comprehensive approach to promoting and selling products or services.

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Starting a Sole Proprietor Business

Advantages and Disadvantages of Sole Proprietorship

What Is a Sole Proprietorship?

• How Does a Sole Prop Get Started?

Advantages of a Sole Proprietorship

• Disadvantages of Sole Proprietorship

Getting Business Insurance Protection

Taxes and sole proprietorships, the bottom line, frequently asked questions (faqs).

Most small businesses are sole proprietorships because they're the easiest and least expensive way to start a business. In fact, the IRS reports that over 27.8 million businesses filed tax returns as sole proprietors by filing Schedule C of Form 1040 in 2019 (the last year calculated).

Key Takeaways

• A sole proprietorship (or “sole prop”) is a form of business in which an individual starts a business under his or her own name.
• Sole proprietorships are simple to set up and don't require registration with states or the federal government.
• One disadvantage of sole proprietorships is that they do not provide liability protection to their owners.
• Profit from a sole proprietorship is included in their owners' personal income tax and paid at the same rate.

The sole proprietorship is the oldest and simplest form of business ownership. A sole proprietorship (or “sole prop”) is a form of business in which an individual starts a business under his or her own name. It's a one-person business; your business can't be a sole proprietorship if it has more than one owner. In a sole proprietorship, you are the business in a sole proprietorship. The business isn't a separate entity from you.

The IRS calls a sole proprietor someone who owns an "unincorporated business by himself or herself." That means the business isn't a corporation (or S corporation) or a single-owner limited liability company (LLC) .

Many sole proprietors work from home and starting a home-based business is often the first step.

How Does a Sole Proprietorship Get Started?

A sole proprietorship is unique because it's the only business that doesn't have to register with a state. All other business types—partnerships, limited liability companies, and corporations—must file a  registration form with each state in which they do business.

Starting a sole prop business is fairly simple. To start a sole proprietorship, all you need to do is:

• Create a  business name  and decide on a location for your business.
• File for a business license with your city or county, and get permission from your locality if you want to operate your business from home.
• Set up a business checking account so you don't mix up business and personal spending.

In addition, your sole proprietorship may have to register with federal or state entities (these registrations are the same for all types of businesses):

• If you plan to sell taxable products or services, you must register with your state's taxing authority .
• If you plan to hire employees, you'll need an Employer Tax ID Number (EIN) from the IRS. Your bank may also require this tax number.

Forming a sole proprietorship offers several advantages.

Easy Startup

You don't have to prepare any legal agreements because you're not in business with someone else, and you don't have to set up an elaborate business structure: no board of directors, no meetings, no minutes, no complicated accounting for shares in the business. You just start running your business.

You have complete control over all the operations and you get to make all the decisions as the sole owner of the business. You don't need a board of directors or shareholders, and you won't have other owners to answer to.

Tax Preparation and Filing

Sole proprietorship income taxes are easy to file, using Schedule C and adding the income/loss from the business to your other income on your personal tax return .

Use of Losses

You can use any business losses to offset personal income from other sources (a spouse 's salary, for example), because you're including your sole proprietorship income/loss on your personal tax return.

You must actively participate in the business and not be just an investor to take the maximum loss. You also have to be careful not to run up against the IRS restrictions on "hobby" businesses which generate losses for years. Losses can lower your taxes if you can prove your business is legitimate and not a hobby.

Disadvantages of a Sole Proprietorship

The primary disadvantage of a sole proprietorship is that your personal finances and those of your business are one and the same. You're personally liable for any debts or obligations of the business when you're the owner. Lawsuits or creditors may be able to access your personal accounts, assets, or property if your business can't pay its bills.

You can't file bankruptcy for your business without filing personal bankruptcy . Filing bankruptcy for your sole proprietorship means involving your personal assets. A bankruptcy case involving a sole proprietorship includes both the business and personal assets of the owners and debtors.

The issues of personal liability and involvement of personal assets outweigh the advantages of sole proprietorship structure for many businesspersons. Consider forming a limited liability company (LLC) or corporation instead if this is the case for you.

You can't protect your personal assets if your business is in trouble financially, but you can have some protection from liability lawsuits if you get property and liability insurance. You'll probably have to get this insurance specifically for your business, but it can help protect you if your business is involved in a liability lawsuit.

You might want to get business auto insurance to cover you while on you're on business trips if you drive your car for business purposes. Most personal auto policies won't cover business driving.

A sole proprietor pays federal and state income taxes on all the net income of the business (income minus deductions), even if you don't have cash on hand to pay these taxes.

Your business income is included with your personal income on your personal tax return. The tax rate you pay may on your business income can be hard to determine because it's all combined. The corporate tax rate is a flat 21% for all corporate income levels, so your tax rate might be higher or lower, depending on your personal tax rate.

And don't forget the self-employment tax. Sole proprietors must pay self-employment tax (Social Security and Medicare) on the profits of their business. This is withheld from your business income, so you'll probably have to make quarterly estimated tax payments for this and your business income tax.

The IRS publishes a Tax Guide for Small Business, which you might find helpful in dealing with federal taxes.

Check with your tax and legal advisors before settling on a business form, even if you have a very small, one-person business. There may be other things you should consider before you start your sole-proprietorship business.

Is a sole proprietorship easy to start up?

A sole proprietorship is a simple form of business to start up. You'll need to choose a business name and a location, secure appropriate business licenses for your region, and get a business bank account to help keep business and personal finances separate. If you plan to hire employees, you'll also need a Tax Identification Number from the IRS.

How much should I pay myself as a sole proprietor?

Sole proprietors don't draw salaries from their businesses. All of the profit (and loss) from the business is reported to the IRS as personal income of the sole proprietor. You'll use Schedule C, which captures all of your business's income and deductions, and your personal 1040 to report these figures. After that, you can decide how much of your business's income to spend on yourself, or on growing and maintaining your business.

IRS. " SOI Tax Stats - Nonfarm Sole Proprietorship Statistics ." Number of Returns, Business Receipts, Business Deductions, Net Income. 2019. Download XLS file. See column B, "Number of returns."

IRS. " Sole Proprietorships ."

Small Business Administration. " Register Your Business ."

California Franchise Tax Board. " Sole Proprietorship. "

IRS Publication 925. " Passive Activity and At-Risk Rules ."

IRS. " How Do You Distinguish Between a Business and a Hobby ?"

Cornell Law School Legal Information Institute. " Sole Proprietorship ."

U.S. Courts. " Chapter 11 - Bankruptcy Basics ."

IRS. " Instructions for Schedule C ."

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What Sole Proprietors Need to Know About Business Licenses

If you conduct business – even as a sole proprietor – you must abide by certain municipal rules.

Table of Contents

Becoming a freelancer can be liberating. You have the freedom to set up shop anywhere you’d like and conduct business from the kitchen, your home office or a coffee shop, or at 35,000 feet. Freelancing has dramatically reshaped how we think about work and empowered individuals to pursue a living without the constraints of the traditional 9-to-5 workday .

A sole proprietorship – the default freelancer business structure – is an unincorporated business that one person owns and runs. However, just because your business blurs the traditional lines of the working world doesn’t mean you can ignore laws and regulations about business licenses and other matters. 

In fact, there’s a good chance you have some municipal rules to follow if you conduct business – even as a sole proprietor.

What sole proprietors need to know about business licenses

Freelancers and solopreneurs choose to run sole proprietorships for many reasons. They’re effortless to form and have minimal costs. But because a sole proprietorship is so uncomplicated, you may be lulled into a sense of complacency about rules and regulations. 

Some sole proprietors assume they’re exempt from business license restrictions because they run a one-person operation or work online. This assumption is inaccurate and can lead to legal issues down the line.

Here are some crucial things for sole proprietors to know about business licenses. 

1. Sole proprietors may be required to obtain a business license. 

Sole proprietors are responsible for finding out if they need a business license. 

Federal, state, county and city governments issue business licenses. Even if the federal government doesn’t require you to get a business license, your state, county or city may have its own requirements. You will likely be required to get at least one business license or permit between federal, state, county and city requirements.

Generally speaking, regulated businesses are more likely to need business licenses at the federal and state levels. For example, if you make jewelry and sell it at festivals, you are less likely to need a state business license than if you open a restaurant . There’s little potential harm if a customer’s jewelry breaks prematurely. It’s much more severe if a restaurant has a food poisoning incident because it didn’t follow food-handling rules. 

If a federal agency, commission, association or board regulates your industry, you’ll need a federal certificate in addition to a business license. These industries include:

• Television and radio broadcasting
• Fish and wildlife
• Agriculture
• Nuclear energy
• Transportation and logistics
• Firearms, ammunition and explosives
• Mining and drilling
• Commercial fishing
• Alcoholic beverages
• Maritime transportation

Sole proprietors should check federal, state, county and city requirements for licenses and permits.

2. Sole proprietors must understand various business license types.

Sole proprietors may need various licenses to operate legally. Some of these licenses include the following:

• Operational licenses: Most sole proprietors need an operational license at a minimum. This license is often required if the sole proprietor has a taxpayer identification number. In some instances, sole proprietors must maintain a state-issued license in addition to a general license if the government regulates its activities. You can get an operational license from the city or county where you conduct business.
• Occupational licenses: Sole proprietors involved in a trade or profession require an occupational license. This license ensures the proprietor has the legal authority to provide a particular service. Some examples of businesses that need an occupational license are tattoo shops, massage therapists, dietitians and childcare. These licenses can be obtained from state departments.
• Federal licenses: Sole proprietorships in federally regulated sectors require federal business licenses. Services such as ground transportation, investment advising and manufacturing firearms are federally regulated.
• State licenses: You must apply for a state license if you’re selling products or services regulated by the state. There are specialized state licenses for mechanics, lawyers, barbers, building contractors and more. Construction companies may need a state license . Additionally, businesses that must comply with state regulations, such as restaurants, also need a state license.
• Permits: Sole proprietors may also need various permits to operate. For example, they may need a DBA (doing business as) name, an assumed name under which they conduct business. They may also need permits from the health department if they’re involved in the sale or preparation of food. If you have a home-based business, you may need land and zoning permits. You may also need a fire permit (if you are dealing with flammable materials) or an environmental permit (for businesses that may cause environmental pollution), among others.
• Sales tax permits/licenses: Most states require a sales tax permit or license for most retail businesses. This means you may need a sales tax license to legally charge sales tax to your customers. If your county or city charges an additional sales tax, you may also need a local sales tax permit.
• Local licenses: Most businesses must obtain a local license. Local licenses often carry the smallest fees and are the easiest to obtain.

3. Sole proprietors must understand where to apply for licenses and permits.

When it comes to business licenses, location matters. For example, if you live in an unincorporated area of a county, you will likely apply for a business license through the county instead of a city. If you work in a city, you’ll need to check the city’s website to see if it requires businesses to obtain permits.

When applying for licenses and permits, sole proprietors should work from the top down: 

• Federal: Determine if your business is federally regulated and what that entails. 
• State: Visit your state’s Secretary of State, commerce department or professional regulation website to determine your state requirements. 
• County: Visit your county’s website to determine what’s required at the county level. 
• City: Visit your city government’s website to ascertain the permits and licenses it requires. 

Sole proprietors are part of the business world

It may be tempting to think your operation doesn’t need licenses and permits because you work from home. Federal, state and local governments will notice eventually. Tax revenue is critical for your community, and you could be subject to penalties for time spent operating without a license.

The freedom of running a sole proprietorship is wonderful, but it’s worth remembering that you’re still part of the business world, and it has some rules for you to follow.

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SIMPLE IRA Tips for the Sole Proprietor

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If you are a Schedule C filer (a sole proprietor) and have a SIMPLE IRA plan, you are treated as both an employer and an employee when calculating and reporting your own plan contributions and limits. Here are some tips.

Where do I report the contributions I make for myself to my SIMPLE IRA?

Report both your salary reduction contributions and employer contributions (non-elective or matching) for yourself on Part II - line 15 of Form 1040 Schedule 1.

This is different from reporting employer contributions (non-elective or matching) for your common-law employees, which you would do as a business expense on your Schedule C.

When must I deposit the contributions I make for myself to my SIMPLE IRA?

You must deposit your salary reduction contributions within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a year must be made by January 30 of the following year.

You must deposit your employer contributions by the due date (including extensions) of your federal income tax return for the tax year that includes the last day of the calendar year for which you made the contributions. For most people, this means employer contributions for a year must be made by April 15 of the following year, or by October 15 if on extension.

What is the maximum contribution I may make for myself to my SIMPLE IRA?

Salary reduction contributions.

You may defer up to $15,500 in 2023, $14,000 in 2022, $13,500 in 2021 and in 2020 and $13,000 in 2019 (adjusted  cost-of-living in later years). However, you may not exceed your net earnings from self-employment from the business sponsoring the SIMPLE IRA plan. If you are age 50 or over, you can make a catch-up contribution of up to $3,500 in 2023 ($3,000 in 2022, 2021, 2020 and 2019 adjusted for cost-of-living in later years).

Employer contributions

Employer contributions for yourself must be the same type and rate as the contributions you make for your common-law employees. You must either:

• match your salary reduction contributions dollar-for-dollar up to 3% of your net earnings from self-employment; or
• make a non-elective contribution of 2% of your net earnings from self-employment that do not exceed $330,000 in 2023; ($305,000 in 2022; $290,000 for 2021 and $285,000 for 2020). This amount was $280,000 for 2019, and it is adjusted for cost-of-living in later years.

Your net earnings from self-employment is the amount you report on line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040) before you subtract any SIMPLE IRA plan contributions you make for yourself.

Your business sponsors a SIMPLE IRA plan. In 2013, your employee, John, earned $25,000 and chose to defer 5% of his salary. Your net earnings from self-employment was $40,000 (as reported on your Form 1040, Schedule SE), and you chose to defer 10% of your earnings to your SIMPLE IRA. You elected to make 3% matching contributions for 2013 for all your employees.

The total SIMPLE IRA plan contribution for John is $2,000.

You deduct John’s contribution on your Form 1040, Schedule C. You must deposit John’s $1,250 salary reduction contributions to his SIMPLE IRA:

• at the earliest date on which you can reasonably segregate them from your business’ general assets, but no later than 30 days following the month in which John would have otherwise received the money; or
• within 7 business days after John would have otherwise received the money, to meet the Department of Labor’s 7-day safe harbor for SIMPLE IRA plans with fewer than 100 participants.

You must deposit the $750 employer matching contribution no later than the due date of your federal income tax return, including extensions.

Your total plan contribution is $5,200.

You deduct the plan contributions for yourself on line 28 of your Form 1040. You must deposit your $4,000 salary reduction contribution to your SIMPLE IRA no later than January 30, 2014. You must deposit the $1,200 employer matching contribution no later than the due date of your federal income tax return, including extensions.

Additional resources

• Self-Employed Individuals – Calculating Your Own Retirement-Plan Contribution and Deduction
• Publication 560, Retirement Plans for Small Business
• Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)
• Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs)
• FAQs – SIMPLE IRA Plans
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Business Insurance for Sole Proprietors: What Coverage You Need, Best Options

Tina Orem is an editor at NerdWallet. Prior to becoming an editor, she covered small business and taxes at NerdWallet. She has been a financial writer and editor for over 15 years, and she has a degree in finance, as well as a master's degree in journalism and a Master of Business Administration. Previously, she was a financial analyst and director of finance for several public and private companies. Tina's work has appeared in a variety of local and national media outlets.

Rosalie Murphy is a small-business writer at NerdWallet. Since 2021, she has covered business insurance, banking, credit cards and e-commerce software, and her reporting has been featured by The Associated Press, MarketWatch, Entrepreneur and many other publications. Rosalie holds a graduate certificate in Quantitative Business Management from Kent State University and is now pursuing an MBA. She is based in Chicago.

Ryan Lane is an editor on NerdWallet’s small-business team. He joined NerdWallet in 2019 as a student loans writer, serving as an authority on that topic after spending more than a decade at student loan guarantor American Student Assistance. In that role, Ryan co-authored the Student Loan Ranger blog in partnership with U.S. News & World Report, as well as wrote and edited content about education financing and financial literacy for multiple online properties, e-courses and more. Ryan also previously oversaw the production of life science journals as a managing editor for publisher Cell Press. Ryan is located in Rochester, New York.

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If you’re a sole proprietor, business insurance — such as general liability insurance, commercial auto insurance and a business owner’s policy — can protect both your business and personal assets in case of lawsuits and other risks. You can probably get the policies you need in just a few minutes online.

Here are NerdWallet’s picks for the best business insurance options for sole proprietors, based on each company’s financial strength, volume of customer complaints, online features and claims experience.

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Best business insurance options for sole proprietors

The best business insurance companies for sole proprietors make it easy to get the coverage you need quickly.

Next: Best overall insurance provider for sole proprietors

Next explains which policies you need based on what industry you’re in and how you answer questions during the quote process. The company also sells most common types of business insurance online, including general liability insurance, professional liability insurance and commercial auto insurance. So whether you need insurance for your cleaning business , personal trainer insurance or otherwise, Next may be a good choice. Read NerdWallet’s review of Next business insurance .

Chubb: Best general liability insurance for sole proprietors

Chubb received fewer complaints about general liability insurance relative to its market share than any other business insurance company evaluated by NerdWallet, which makes it our pick for the best small-business general liability insurance . You can buy business insurance online from Chubb if your business earns $1 million or less in annual revenue. Chubb also offers a business owner’s policy, errors and omissions insurance and cybersecurity insurance online. Read NerdWallet’s review of Chubb small-business insurance .

Thimble: Best for temporary coverage

If a contract for an event or job requires you to have business insurance, Thimble offers insurance policies a month at a time or for one specific job. This can help you save money, since you won’t have to pay a premium on an ongoing basis. Thimble offers general liability, professional liability and commercial property insurance, but not commercial auto insurance. Read NerdWallet’s review of Thimble insurance .

The Hartford: Best business owner’s policy for sole proprietors

You can add data breach insurance and professional liability insurance to The Hartford’s business owner’s policy, making it a good choice for small-business owners who don’t want to manage multiple policies. Some business owners can buy a policy online, or The Hartford may connect you to a staff member to complete your purchase. Read NerdWallet’s review of The Hartford business insurance .

Allstate: Best for commercial auto insurance

You can get a commercial auto insurance quote online from Allstate, which is one of the top 10 providers of commercial auto insurance by market share in the U.S., according to the Insurance Information Institute. You can also get a business owner’s policy and other coverages directly from Allstate. The company’s high rating from NerdWallet reflects the low number of complaints filed with state regulators relative to its size. Read NerdWallet’s review of Allstate business insurance.

Do sole proprietors need business insurance?

Sole proprietors should at least carry general liability insurance . This coverage protects you if someone files a lawsuit accusing you of damaging their property, injuring them or harming their reputation. As a sole proprietorship, a lawsuit could jeopardize your personal assets, not just your business finances.

You may also want to consider the following types of business insurance depending on what sort of work you do.

If you need commercial property and business interruption insurance, consider a business owner's policy . BOPs usually combine those coverages with general liability insurance. You may also be able to tack on some cybersecurity insurance and professional liability insurance coverage as well.

How to get business insurance for your sole proprietorship

Sole proprietors can get business insurance online or over the phone, either right from an insurance company or through an insurance marketplace or third-party broker. Get multiple quotes from different business insurance providers before making a decision.

When comparing quotes, consider things such as:

Policy coverage: Business insurance policies are often quite similar from one provider to another. But look closely at exclusions, additional coverages and endorsements in case there are key differences there.

Limits of liability: The per-occurrence limit is the maximum the insurance company will pay out for each claim and the aggregate limit is the maximum amount the company will pay out during the policy term. Larger or riskier businesses may need a higher limit.

Price: Compare policy premiums as well as deductibles, which is the amount you’ll have to pay out of pocket before your insurance kicks in. Lower premiums often come with higher deductibles, which means you’ll pay less on a monthly basis but more in the event of a claim.

» MORE: Business insurance companies: How to compare providers

After you buy your insurance policies, make sure you understand when your payments are due and how to manage your coverage — including how to file a claim, add endorsements or get a certificate of liability insurance .

Reevaluate your business insurance coverage annually. When your policies are up for renewal, think about how you like the coverage, costs and customer service you’re getting, as well as any new risks you face. That way you’ll always be sure you have the right coverage for your business.

Business insurance ratings methodology

NerdWallet’s business insurance ratings reward companies that offer small-business owners reliability and ease of use. Ratings are based on weighted averages of scores in several categories, including financial strength, customer complaint data, shopping experience and customer service. Learn more about how we rate small-business insurance companies .

These ratings are a guide, but insurance policy details and prices can vary widely from business to business and provider to provider. We encourage you to shop around and compare several insurance quotes.

NerdWallet does not receive compensation for any reviews. Read our editorial guidelines .

Insurer complaints methodology

NerdWallet examined complaints received by state insurance regulators and reported to the National Association of Insurance Commissioners in 2018-2021.

To assess how insurers compare to one another, the NAIC calculates a complaint index each year for each subsidiary, measuring its share of total complaints relative to its size, or share of total premiums in the industry. To evaluate a company’s complaint history, NerdWallet calculated a similar index for each insurer, weighted by market shares of each subsidiary, over the three-year period.

Our star ratings consider ratios for both general liability insurance and commercial property insurance. When an insurer sells policies that are underwritten by several different insurance companies, we consider the NAIC complaint ratios of all the underwriters.

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Sole proprietors and LLCs: Do you need a business license?

An entrepreneur is often bombarded with decisions to get a new business up and running. One of those myriad decisions is usually what form of business entity to establish: Operate as a sole proprietor, a limited liability company (LLC), an S corporation, or a standard corporation. Individuals venturing out on their own often debate between beginning as a sole proprietor or an LLC.

Both sole proprietorships and LLCs carry advantages, but the requirements and regulations differ, and each comes with different tax implications. Whether you need a business license largely depends on your location and business activities. Let’s dive a little deeper to explain.

Sole proprietors

Sole proprietorship is often the simplest form of business entity for individual business owners — fewer legal restrictions, less paperwork, and no separation of profits or tax filings. You also don’t have to register with the state unless you operate the business under a different name. But that lack of distinction between what’s personal and what’s business also carries unlimited personal liability —business losses, taxes, legal issues, reputation, etc., are all tangled up with personal identity.

Whether you need a business license as a sole proprietor can be a gray area. Business license requirements are a highly location-specific directive that can also be impacted by your industry or business activities. Check with your local authorities — state, county, city — to know for certain.

For example, if you’re a freelance designer, you’re technically a sole proprietor, and some states don’t obligate licenses for those professionals. But then you have cities such as Alameda, California, that make it clear: “All individuals, partnerships, corporations, and sole proprietors conducting business in the City of Alameda are required to have a business license. This includes persons dealing with residential and commercial real estate rentals or who operate home-based businesses in the city.”

Sole proprietors in a marketplace

Marketplaces such as eBay generally don’t require sellers to hold business licenses . You may not need a license if you simply plan to sell products online occasionally, but if you’re planning to grow your side gig into a business, you likely will. Again, check with your local authorities to be sure. Many local municipalities require online sellers or at-home businesses to carry a license or other permits.

Limited Liability Company

An LLC doesn’t restrict the number of members, and most states allow for single-member LLCs. But whether comprised of a single member or multiple members, the LLC must operate under a business name, not an individual's name, and states generally require “Limited Liability Company” or “LLC” to be included in the registered name (e.g., “Fancy Flower Shop, LLC”). Operating as the sole member of an LLC is not the same as operating as a sole proprietor but does bear some similarities. 

As an LLC, you can operate as self-employed and not pay corporate sales tax but pay self-employment tax instead. Or you may choose to be taxed as a corporation. In either case, an LLC protects your personal assets and reputation from your company’s liabilities and debts, which is not the case when operating as a sole proprietor.

Unlike sole proprietorships, LLCs typically need to register with the state of formation. If you intend to operate in other states (i.e., “foreign” states) as well, you must qualify to do business as a foreign LLC in those states. This generally entails obtaining a Certificate of Status (aka, Certificate of Good Standing ) from your home state so you can obtain a Certificate of Authority (aka, Application for Authority, or Foreign LLC Registration) in the other state. You’ll also need to pay associated LLC filing and reporting fees. For an idea of what that can cost, check out the New York Department of State’s page on foreign (non-New York) LLCs . 

Business license requirements, again, come down to location and business activities.

Before deciding which form of business you’ll operate, do your research to discover the distinctive requirements and regulations for each. You may find one is more appropriate for you than the other. Once you’ve decided your business type, research state and local governments’ business license requirements . Every state, county, and city is unique. Depending on your business activity, you may also need a federal license.

Different business activities call for different licenses

Sole proprietorship or LLC, it’s important to keep in mind that business activities and transactions affect licensing requirements. Even if your LLC itself doesn’t need a business license, you’re still going to need a food handler license to prepare food, a liquor license for alcohol sales, or a cosmetology license for a barbershop, etc. Business activity licenses are generally location specific: A cosmetology license for Kingston, Washington, likely won’t cover a stylist working in nearby Poulsbo, Washington.

To dive deeper into business license information and get assistance for your licensing needs, visit Avalara .

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How To Start A Business In 11 Steps (2024 Guide)

Updated: Apr 7, 2024, 1:44pm

Table of Contents

Before you begin: get in the right mindset, 1. determine your business concept, 2. research your competitors and market, 3. create your business plan, 4. choose your business structure, 5. register your business and get licenses, 6. get your finances in order, 7. fund your business, 8. apply for business insurance, 9. get the right business tools, 10. market your business, 11. scale your business, what are the best states to start a business, bottom line, frequently asked questions (faqs).

Starting a business is one of the most exciting and rewarding experiences you can have. But where do you begin? There are several ways to approach creating a business, along with many important considerations. To help take the guesswork out of the process and improve your chances of success, follow our comprehensive guide on how to start a business. We’ll walk you through each step of the process, from defining your business idea to registering, launching and growing your business .

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The public often hears about overnight successes because they make for a great headline. However, it’s rarely that simple—they don’t see the years of dreaming, building and positioning before a big public launch. For this reason, remember to focus on your business journey and don’t measure your success against someone else’s.

Consistency Is Key

New business owners tend to feed off their motivation initially but get frustrated when that motivation wanes. This is why it’s essential to create habits and follow routines that power you through when motivation goes away.

Take the Next Step

Some business owners dive in headfirst without looking and make things up as they go along. Then, there are business owners who stay stuck in analysis paralysis and never start. Perhaps you’re a mixture of the two—and that’s right where you need to be. The best way to accomplish any business or personal goal is to write out every possible step it takes to achieve the goal. Then, order those steps by what needs to happen first. Some steps may take minutes while others take a long time. The point is to always take the next step.

Most business advice tells you to monetize what you love, but it misses two other very important elements: it needs to be profitable and something you’re good at. For example, you may love music, but how viable is your business idea if you’re not a great singer or songwriter? Maybe you love making soap and want to open a soap shop in your small town that already has three close by—it won’t be easy to corner the market when you’re creating the same product as other nearby stores.

If you don’t have a firm idea of what your business will entail, ask yourself the following questions:

• What do you love to do?
• What do you hate to do?
• Can you think of something that would make those things easier?
• What are you good at?
• What do others come to you for advice about?
• If you were given ten minutes to give a five-minute speech on any topic, what would it be?
• What’s something you’ve always wanted to do, but lacked resources for?

These questions can lead you to an idea for your business. If you already have an idea, they might help you expand it. Once you have your idea, measure it against whether you’re good at it and if it’s profitable.

Your business idea also doesn’t have to be the next Scrub Daddy or Squatty Potty. Instead, you can take an existing product and improve upon it. You can also sell a digital product so there’s little overhead.

What Kind of Business Should You Start?

Before you choose the type of business to start, there are some key things to consider:

• What type of funding do you have?
• How much time do you have to invest in your business?
• Do you prefer to work from home or at an office or workshop?
• What interests and passions do you have?
• Can you sell information (such as a course), rather than a product?
• What skills or expertise do you have?
• How fast do you need to scale your business?
• What kind of support do you have to start your business?
• Are you partnering with someone else?
• Does the franchise model make more sense to you?

Consider Popular Business Ideas

Not sure what business to start? Consider one of these popular business ideas:

• Start a Franchise
• Start a Blog
• Start an Online Store
• Start a Dropshipping Business
• Start a Cleaning Business
• Start a Bookkeeping Business
• Start a Clothing Business
• Start a Landscaping Business
• Start a Consulting Business
• Start a Photography Business
• Start a Vending Machine Business

Most entrepreneurs spend more time on their products than they do getting to know the competition. If you ever apply for outside funding, the potential lender or partner wants to know: what sets you (or your business idea) apart? If market analysis indicates your product or service is saturated in your area, see if you can think of a different approach. Take housekeeping, for example—rather than general cleaning services, you might specialize in homes with pets or focus on garage cleanups.

Primary Research

The first stage of any competition study is primary research, which entails obtaining data directly from potential customers rather than basing your conclusions on past data. You can use questionnaires, surveys and interviews to learn what consumers want. Surveying friends and family isn’t recommended unless they’re your target market. People who say they’d buy something and people who do are very different. The last thing you want is to take so much stock in what they say, create the product and flop when you try to sell it because all of the people who said they’d buy it don’t because the product isn’t something they’d buy.

Secondary Research

Utilize existing sources of information, such as census data, to gather information when you do secondary research. The current data may be studied, compiled and analyzed in various ways that are appropriate for your needs but it may not be as detailed as primary research.

Conduct a SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities and threats. Conducting a SWOT analysis allows you to look at the facts about how your product or idea might perform if taken to market, and it can also help you make decisions about the direction of your idea. Your business idea might have some weaknesses that you hadn’t considered or there may be some opportunities to improve on a competitor’s product.

Asking pertinent questions during a SWOT analysis can help you identify and address weaknesses before they tank your new business.

A business plan is a dynamic document that serves as a roadmap for establishing a new business. This document makes it simple for potential investors, financial institutions and company management to understand and absorb. Even if you intend to self-finance, a business plan can help you flesh out your idea and spot potential problems. When writing a well-rounded business plan, include the following sections:

• Executive summary: The executive summary should be the first item in the business plan, but it should be written last. It describes the proposed new business and highlights the goals of the company and the methods to achieve them.
• Company description: The company description covers what problems your product or service solves and why your business or idea is best. For example, maybe your background is in molecular engineering, and you’ve used that background to create a new type of athletic wear—you have the proper credentials to make the best material.
• Market analysis: This section of the business plan analyzes how well a company is positioned against its competitors. The market analysis should include target market, segmentation analysis, market size, growth rate, trends and a competitive environment assessment.
• Organization and structure: Write about the type of business organization you expect, what risk management strategies you propose and who will staff the management team. What are their qualifications? Will your business be a single-member limited liability company (LLC) or a corporation ?
• Mission and goals: This section should contain a brief mission statement and detail what the business wishes to accomplish and the steps to get there. These goals should be SMART (specific, measurable, action-orientated, realistic and time-bound).
• Products or services: This section describes how your business will operate. It includes what products you’ll offer to consumers at the beginning of the business, how they compare to existing competitors, how much your products cost, who will be responsible for creating the products, how you’ll source materials and how much they cost to make.
• Background summary: This portion of the business plan is the most time-consuming to write. Compile and summarize any data, articles and research studies on trends that could positively and negatively affect your business or industry.
• Marketing plan: The marketing plan identifies the characteristics of your product or service, summarizes the SWOT analysis and analyzes competitors. It also discusses how you’ll promote your business, how much money will be spent on marketing and how long the campaign is expected to last.
• Financial plan: The financial plan is perhaps the core of the business plan because, without money, the business will not move forward. Include a proposed budget in your financial plan along with projected financial statements, such as an income statement, a balance sheet and a statement of cash flows. Usually, five years of projected financial statements are acceptable. This section is also where you should include your funding request if you’re looking for outside funding.

Learn more: Download our free simple business plan template .

Come Up With an Exit Strategy

An exit strategy is important for any business that is seeking funding because it outlines how you’ll sell the company or transfer ownership if you decide to retire or move on to other projects. An exit strategy also allows you to get the most value out of your business when it’s time to sell. There are a few different options for exiting a business, and the best option for you depends on your goals and circumstances.

The most common exit strategies are:

• Selling the business to another party
• Passing the business down to family members
• Liquidating the business assets
• Closing the doors and walking away

Develop a Scalable Business Model

As your small business grows, it’s important to have a scalable business model so that you can accommodate additional customers without incurring additional costs. A scalable business model is one that can be replicated easily to serve more customers without a significant increase in expenses.

Some common scalable business models are:

• Subscription-based businesses
• Businesses that sell digital products
• Franchise businesses
• Network marketing businesses

Start Planning for Taxes

One of the most important things to do when starting a small business is to start planning for taxes. Taxes can be complex, and there are several different types of taxes you may be liable for, including income tax, self-employment tax, sales tax and property tax. Depending on the type of business you’re operating, you may also be required to pay other taxes, such as payroll tax or unemployment tax.

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When structuring your business, it’s essential to consider how each structure impacts the amount of taxes you owe, daily operations and whether your personal assets are at risk.

An LLC limits your personal liability for business debts. LLCs can be owned by one or more people or companies and must include a registered agent . These owners are referred to as members.

• LLCs offer liability protection for the owners
• They’re one of the easiest business entities to set up
• You can have a single-member LLC
• You may be required to file additional paperwork with your state on a regular basis
• LLCs can’t issue stock
• You’ll need to pay annual filing fees to your state

Limited Liability Partnership (LLP)

An LLP is similar to an LLC but is typically used for licensed business professionals such as an attorney or accountant. These arrangements require a partnership agreement.

• Partners have limited liability for the debts and actions of the LLP
• LLPs are easy to form and don’t require much paperwork
• There’s no limit to the number of partners in an LLP
• Partners are required to actively take part in the business
• LLPs can’t issue stock
• All partners are personally liable for any malpractice claims against the business

Sole Proprietorship

If you start a solo business, you might consider a sole proprietorship . The company and the owner, for legal and tax purposes, are considered the same. The business owner assumes liability for the business. So, if the business fails, the owner is personally and financially responsible for all business debts.

• Sole proprietorships are easy to form
• There’s no need to file additional paperwork with your state
• You’re in complete control of the business
• You’re personally liable for all business debts
• It can be difficult to raise money for a sole proprietorship
• The business may have a limited lifespan

Corporation

A corporation limits your personal liability for business debts just as an LLC does. A corporation can be taxed as a C corporation (C-corp) or an S corporation (S-corp). S-corp status offers pass-through taxation to small corporations that meet certain IRS requirements. Larger companies and startups hoping to attract venture capital are usually taxed as C-corps.

• Corporations offer liability protection for the owners
• The life span of a corporation is not limited
• A corporation can have an unlimited number of shareholders
• Corporations are subject to double taxation
• They’re more expensive and complicated to set up than other business structures
• The shareholders may have limited liability

Before you decide on a business structure, discuss your situation with a small business accountant and possibly an attorney, as each business type has different tax treatments that could affect your bottom line.

Helpful Resources

• How To Set Up an LLC in 7 Steps
• How To Start a Sole Proprietorship
• How To Start a Corporation
• How To Start a Nonprofit
• How To Start a 501(c)(3)

There are several legal issues to address when starting a business after choosing the business structure. The following is a good checklist of items to consider when establishing your business:

Choose Your Business Name

Make it memorable but not too difficult. Choose the same domain name, if available, to establish your internet presence. A business name cannot be the same as another registered company in your state, nor can it infringe on another trademark or service mark that is already registered with the United States Patent and Trademark Office (USPTO).

Business Name vs. DBA

There are business names, and then there are fictitious business names known as “Doing Business As” or DBA. You may need to file a DBA if you’re operating under a name that’s different from the legal name of your business. For example, “Mike’s Bike Shop” is doing business as “Mike’s Bikes.” The legal name of the business is “Mike’s Bike Shop,” and “Mike’s Bikes” is the DBA.

You may need to file a DBA with your state, county or city government offices. The benefits of a DBA include:

• It can help you open a business bank account under your business name
• A DBA can be used as a “trade name” to brand your products or services
• A DBA can be used to get a business license

Register Your Business and Obtain an EIN

You’ll officially create a corporation, LLC or other business entity by filing forms with your state’s business agency―usually the Secretary of State. As part of this process, you’ll need to choose a registered agent to accept legal documents on behalf of your business. You’ll also pay a filing fee. The state will send you a certificate that you can use to apply for licenses, a tax identification number (TIN) and business bank accounts.

Next, apply for an employer identification number (EIN) . All businesses, other than sole proprietorships with no employees, must have a federal employer identification number. Submit your application to the IRS and you’ll typically receive your number in minutes.

Get Appropriate Licenses and Permits

Legal requirements are determined by your industry and jurisdiction. Most businesses need a mixture of local, state and federal licenses to operate. Check with your local government office (and even an attorney) for licensing information tailored to your area.

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Open a Business Bank Account

Keep your business and personal finances separate. Here’s how to choose a business checking account —and why separate business accounts are essential. When you open a business bank account, you’ll need to provide your business name and your business tax identification number (EIN). This business bank account can be used for your business transactions, such as paying suppliers or invoicing customers. Most times, a bank will require a separate business bank account to issue a business loan or line of credit.

Hire a Bookkeeper or Get Accounting Software

If you sell a product, you need an inventory function in your accounting software to manage and track inventory. The software should have ledger and journal entries and the ability to generate financial statements.

Some software programs double as bookkeeping tools. These often include features such as check writing and managing receivables and payables. You can also use this software to track your income and expenses, generate invoices, run reports and calculate taxes.

There are many bookkeeping services available that can do all of this for you, and more. These services can be accessed online from any computer or mobile device and often include features such as bank reconciliation and invoicing. Check out the best accounting software for small business, or see if you want to handle the bookkeeping yourself.

Determine Your Break-Even Point

Before you fund your business, you must get an idea of your startup costs. To determine these, make a list of all the physical supplies you need, estimate the cost of any professional services you will require, determine the price of any licenses or permits required to operate and calculate the cost of office space or other real estate. Add in the costs of payroll and benefits, if applicable.

Businesses can take years to turn a profit, so it’s better to overestimate the startup costs and have too much money than too little. Many experts recommend having enough cash on hand to cover six months of operating expenses.

When you know how much you need to get started with your business, you need to know the point at which your business makes money. This figure is your break-even point.

In contrast, the contribution margin = total sales revenue – cost to make product

For example, let’s say you’re starting a small business that sells miniature birdhouses for fairy gardens. You have determined that it will cost you $500 in startup costs. Your variable costs are $0.40 per birdhouse produced, and you sell them for $1.50 each.

Let’s write these out so it’s easy to follow:

This means that you need to sell at least 456 units just to cover your costs. If you can sell more than 456 units in your first month, you will make a profit.

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There are many different ways to fund your business—some require considerable effort, while others are easier to obtain. Two categories of funding exist: internal and external.

Internal funding includes:

• Personal savings
• Credit cards
• Funds from friends and family

If you finance the business with your own funds or with credit cards, you have to pay the debt on the credit cards and you’ve lost a chunk of your wealth if the business fails. By allowing your family members or friends to invest in your business, you are risking hard feelings and strained relationships if the company goes under. Business owners who want to minimize these risks may consider external funding.

External funding includes:

• Small business loans
• Small business grants
• Angel investors
• Venture capital
• Crowdfunding

Small businesses may have to use a combination of several sources of capital. Consider how much money is needed, how long it will take before the company can repay it and how risk-tolerant you are. No matter which source you use, plan for profit. It’s far better to take home six figures than make seven figures and only keep $80,000 of it.

Funding ideas include:

• Invoice factoring: With invoice factoring , you can sell your unpaid invoices to a third party at a discount.
• Business lines of credit: Apply for a business line of credit , which is similar to a personal line of credit. The credit limit and interest rate will be based on your business’s revenue, credit score and financial history.
• Equipment financing: If you need to purchase expensive equipment for your business, you can finance it with a loan or lease.
• Small Business Administration (SBA) microloans: Microloans are up to $50,000 loans that can be used for working capital, inventory or supplies and machinery or equipment.
• Grants: The federal government offers grants for businesses that promote innovation, export growth or are located in historically disadvantaged areas. You can also find grants through local and regional organizations.
• Crowdfunding: With crowdfunding , you can raise money from a large group of people by soliciting donations or selling equity in your company.

Choose the right funding source for your business by considering the amount of money you need, the time frame for repayment and your tolerance for risk.

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You need to have insurance for your business , even if it’s a home-based business or you don’t have any employees. The type of insurance you need depends on your business model and what risks you face. You might need more than one type of policy, and you might need additional coverage as your business grows. In most states, workers’ compensation insurance is required by law if you have employees.

Work With an Agent To Get Insured

An insurance agent can help determine what coverages are appropriate for your business and find policies from insurers that offer the best rates. An independent insurance agent represents several different insurers, so they can shop around for the best rates and coverage options.

Basic Types of Business Insurance Coverage

• Liability insurance protects your business against third-party claims of bodily injury, property damage and personal injury such as defamation or false advertising.
• Property insurance covers the physical assets of your business, including your office space, equipment and inventory.
• Business interruption insurance pays for the loss of income if your business is forced to close temporarily due to a covered event such as a natural disaster.
• Product liability insurance protects against claims that your products caused bodily injury or property damage.
• Employee practices liability insurance covers claims from employees alleging discrimination, sexual harassment or other wrongful termination.
• Workers’ compensation insurance covers medical expenses and income replacement for employees who are injured on the job.
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Business tools can help make your life easier and make your business run more smoothly. The right tools can help you save time, automate tasks and make better decisions.

Consider the following tools in your arsenal:

• Accounting software : Track your business income and expenses, prepare financial statements and file taxes. Examples include QuickBooks and FreshBooks.
• Customer relationship management (CRM) software : This will help you manage your customer relationships, track sales and marketing data and automate tasks like customer service and follow-ups. Examples include Zoho CRM and monday.com.
• Project management software : Plan, execute and track projects. It can also be used to manage employee tasks and allocate resources. Examples include Airtable and ClickUp.
• Credit card processor : This will allow you to accept credit card payments from customers. Examples include Stripe and PayPal.
• Point of sale (POS) : A system that allows you to process customer payments. Some accounting software and CRM software have POS features built-in. Examples include Clover and Lightspeed.
• Virtual private network (VPN) : Provides a secure, private connection between your computer and the internet. This is important for businesses that handle sensitive data. Examples include NordVPN and ExpressVPN.
• Merchant services : When customers make a purchase, the money is deposited into your business account. You can also use merchant services to set up recurring billing or subscription payments. Examples include Square and Stripe.
• Email hosting : This allows you to create a professional email address with your own domain name. Examples include G Suite and Microsoft Office 365.

Many business owners spend so much money creating their products that there isn’t a marketing budget by the time they’ve launched. Alternatively, they’ve spent so much time developing the product that marketing is an afterthought.

Create a Website

Even if you’re a brick-and-mortar business, a web presence is essential. Creating a website doesn’t take long, either—you can have one done in as little as a weekend. You can make a standard informational website or an e-commerce site where you sell products online. If you sell products or services offline, include a page on your site where customers can find your locations and hours. Other pages to add include an “About Us” page, product or service pages, frequently asked questions (FAQs), a blog and contact information.

Optimize Your Site for SEO

After getting a website or e-commerce store, focus on optimizing it for search engines (SEO). This way, when a potential customer searches for specific keywords for your products, the search engine can point them to your site. SEO is a long-term strategy, so don’t expect a ton of traffic from search engines initially—even if you’re using all the right keywords.

Create Relevant Content

Provide quality digital content on your site that makes it easy for customers to find the correct answers to their questions. Content marketing ideas include videos, customer testimonials, blog posts and demos. Consider content marketing one of the most critical tasks on your daily to-do list. This is used in conjunction with posting on social media.

Get Listed in Online Directories

Customers use online directories like Yelp, Google My Business and Facebook to find local businesses. Some city halls and chambers of commerce have business directories too. Include your business in as many relevant directories as possible. You can also create listings for your business on specific directories that focus on your industry.

Develop a Social Media Strategy

Your potential customers are using social media every day—you need to be there too. Post content that’s interesting and relevant to your audience. Use social media to drive traffic back to your website where customers can learn more about what you do and buy your products or services.

You don’t necessarily need to be on every social media platform available. However, you should have a presence on Facebook and Instagram because they offer e-commerce features that allow you to sell directly from your social media accounts. Both of these platforms have free ad training to help you market your business.

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To scale your business, you need to grow your customer base and revenue. This can be done by expanding your marketing efforts, improving your product or service, collaborating with other creators or adding new products or services that complement what you already offer.

Think about ways you can automate or outsource certain tasks so you can focus on scaling the business. For example, if social media marketing is taking up too much of your time, consider using a platform such as Hootsuite to help you manage your accounts more efficiently. You can also consider outsourcing the time-consumer completely.

You can also use technology to automate certain business processes, including accounting, email marketing and lead generation. Doing this will give you more time to focus on other aspects of your business.

When scaling your business, it’s important to keep an eye on your finances and make sure you’re still profitable. If you’re not making enough money to cover your costs, you need to either reduce your expenses or find ways to increase your revenue.

Build a Team

As your business grows, you’ll need to delegate tasks and put together a team of people who can help you run the day-to-day operations. This might include hiring additional staff, contractors or freelancers.

Resources for building a team include:

• Hiring platforms: To find the right candidates, hiring platforms, such as Indeed and Glassdoor, can help you post job descriptions, screen résumés and conduct video interviews.
• Job boards: Job boards such as Craigslist and Indeed allow you to post open positions for free.
• Social media: You can also use social media platforms such as LinkedIn and Facebook to find potential employees.
• Freelance platforms: Using Upwork, Freelancer and Fiverr can help you find talented freelancers for one-time or short-term projects. You can also outsource certain tasks, such as customer service, social media marketing or bookkeeping.

You might also consider partnering with other businesses in your industry. For example, if you’re a wedding planner, you could partner with a florist, photographer, catering company or venue. This way, you can offer your customers a one-stop shop for all their wedding needs. Another example is an e-commerce store that partners with a fulfillment center. This type of partnership can help you save money on shipping and storage costs, and it can also help you get your products to your customers faster.

To find potential partnerships, search for businesses in your industry that complement what you do. For example, if you’re a web designer, you could partner with a digital marketing agency.

You can also search for businesses that serve the same target market as you but offer different products or services. For example, if you sell women’s clothing, you could partner with a jewelry store or a hair salon.

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To rank the best states to start a business in 2024, Forbes Advisor analyzed 18 key metrics across five categories to determine which states are the best and worst to start a business in. Our ranking takes into consideration factors that impact businesses and their ability to succeed, such as business costs, business climate, economy, workforce and financial accessibility in each state. Check out the full report .

Starting a small business takes time, effort and perseverance. But if you’re willing to put in the work, it can be a great way to achieve your dreams and goals. Be sure to do your research, create a solid business plan and pivot along the way. Once you’re operational, don’t forget to stay focused and organized so you can continue to grow your business.

How do I start a small business with no money?

There are several funding sources for brand-new businesses and most require a business plan to secure it. These include the SBA , private grants, angel investors, crowdfunding and venture capital.

What is the best business structure?

The best business structure for your business will depend entirely on what kind of company you form, your industry and what you want to accomplish. But any successful business structure will be one that will help your company set realistic goals and follow through on set tasks.

Do I need a business credit card?

You don’t need one, but a business credit card can be helpful for new small businesses. It allows you to start building business credit, which can help you down the road when you need to take out a loan or line of credit. Additionally, business credit cards often come with rewards and perks that can save you money on business expenses.

Do I need a special license or permit to start a small business?

The answer to this question will depend on the type of business you want to start and where you’re located. Some businesses, such as restaurants, will require a special permit or license to operate. Others, such as home daycare providers, may need to register with the state.

How much does it cost to create a business?

The cost of starting a business will vary depending on the size and type of company you want to create. For example, a home-based business will be less expensive to start than a brick-and-mortar store. Additionally, the cost of starting a business will increase if you need to rent or buy commercial space, hire employees or purchase inventory. You could potentially get started for free by dropshipping or selling digital goods.

How do I get a loan for a new business?

The best way to get a loan for a new business is to approach banks or other financial institutions and provide them with a business plan and your financial history. You can also look into government-backed loans, such as those offered by the SBA. Startups may also be able to get loans from alternative lenders, including online platforms such as Kiva.

Do I need a business degree to start a business?

No, you don’t need a business degree to start a business. However, acquiring a degree in business or a related field can provide you with the understanding and ability to run an effective company. Additionally, you may want to consider taking some business courses if you don’t have a degree to learn more about starting and running a business. You can find these online and at your local Small Business Administration office.

What are some easy businesses to start?

One of the easiest businesses to start also has the lowest overhead: selling digital goods. This can include items such as e-books, online courses, audio files or software. If you have expertise in a particular area or niche, this is a great option for you. Dropshipping is also a great option because you don’t have to keep inventory. You could also buy wholesale products or create your own. Once you create your product, you can sell it through your own website or third-party platforms such as Amazon or Etsy.

What is the most profitable type of business?

There is no one answer to this question because the most profitable type of business will vary depending on a number of factors, such as your industry, location, target market and business model. However, some businesses tend to be more profitable than others, such as luxury goods, high-end services, business-to-business companies and subscription-based businesses. If you’re not sure what type of business to start, consider your strengths and interests, as well as the needs of your target market, to help you choose a profitable business idea.

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Katherine Haan is a small business owner with nearly two decades of experience helping other business owners increase their incomes.

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From LLCs to S Corps, a Detailed Guide to 11 Business Structures

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Before turning your business idea into a thriving business, you might determine the right business structure for your company.

This isn’t just a formality. The structure you choose is a strategic cornerstone that affects everything from your personal liability to potential investment opportunities.

After nearly three decades as a lawyer, entrepreneur, and mentor, I’ve seen firsthand the ups and downs of setting up a corporation, the steps to create an LLC, the nuances of starting partnerships, and the structures we discuss in this guide. This guide draws from my direct experience. It offers practical advice, actionable tips, and best practices gathered from mentoring hundreds of entrepreneurs and helping thousands to establish and grow their businesses.

Business Structures: The Ultimate Guide

1. Limited Liability Company (LLC) 2. General Partnership (GP) 3. Limited Partnership (LP) 4. Limited Liability Partnership (LLP) 5. Sole Proprietorship 6. C Corporation (C Corp) 7. S Corporation (S Corp) 8. Nonprofit 9. Co-operative 10. B Corporation 11. Joint Venture Other vital considerations related to your business structure Frequently Asked Questions (FAQs)

Choosing how to structure your business hinges on several key factors.

• Are you going solo, or do you have partners?
• How much personal financial risk are you comfortable taking?
• Do you plan to issue stock?
• Additionally, consider the specific licenses and insurance your business requires. These elements will guide you in selecting the most suitable business framework.

The four most popular business structures are sole proprietorships, partnerships, limited liability companies, and corporations. So, if you have a great business idea and are ready to start your business, read on to learn about eleven different types of business structures and how to decide the right one.

1. Limited Liability Company (LLC)

The Limited Liability Company (LLC) is the favorite of many, protecting personal assets from business debts. Whether flying solo or having partners, an LLC is flexible and relatively easy to set up.

An LLC (Limited Liability Company) is known as a ‘pass-through’ entity because the profits of an LLC flow directly to the managers/members.

This business structure is quickly becoming the most common form of incorporation. LLCs have a relatively flexible structure that provides many benefits of a partnership or sole proprietorship, with some of the protections provided by C corps and S corps (more on those business structures below). They do not require many formal processes required by other types of corporations.

However, LLCs cannot offer stock to the public, have some ongoing annual filing requirements, and are still required to keep internal paperwork.

Importantly, people who ignore the requirements of operating an LLC can lose their personal liability protection in a process called /piercing the corporate veil’. If this happens, business owners can retroactively be held liable to pay corporate debts with personal funds.

This is the type of structure I’ve personally used across many new startups (except for companies that I knew would require outside funding – for those, I used a C Corp structure). LLCs are simple to create, have minimal state requirements, and offer flexibility.

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Pros of an LLC:

• Protection against personal liability. Owners, or ‘members,’ enjoy a safeguard for their personal assets. For instance, if a coffee shop structured as an LLC faces a lawsuit, the owner’s personal assets (like their home or car) are generally protected.
• Simplicity in formation. Compared to corporations, setting up an LLC is more straightforward. An online retail store can be established as an LLC with less red tape and fewer formalities, such as corporate bylaws or board meetings. LLCs can be established same-day and, sometimes, within one hour (for an expedited fee).
• Operational flexibility. An LLC can be a solo endeavor or include multiple members. A freelance graphic designer can form a single-member LLC, enjoying the benefits of limited liability without needing partners.

Cons of an LLC:

• Ongoing state requirements. LLCs might be subject to routine filings, like annual reports. A digital marketing LLC, for instance, must keep up with these requirements to maintain its status. In most states, these requirements are minimal.
• Limitations on raising capital. Unlike corporations, LLCs can’t issue stock. A tech startup LLC looking to scale quickly might find this limits its options for raising capital through traditional means like an IPO.
• State-level fees.  Most states impose yearly fees on LLCs. A boutique clothing store operating as an LLC, for example, must budget for these recurring expenses, which can vary significantly by state. These fees tend to range from zero to $300 per year.

S Corp elections for LLCs

Many people don’t know that LLCs can also make S Corp elections (more detailed info about S Corps is below).

An S Corp election for an LLC can also provide additional tax benefits to an LLC.

By making an S corp election, the LLC distributions (the passing of profits after payment of LLC expenses, including payroll) are not treated or taxed as wage income to the owners.

Let’s say, for example, that you own an LLC, and the annual profits are $1M. Without an S corp election,  all profits pass through to the owners’ personal income, and the LLC owner would have to pay payroll taxes on the $1M worth of profits.

When an LLC elects to be taxed as an S Corporation, the owner’s reasonable salary is subject to payroll taxes (which cover Social Security and Medicare). Still, the distributions (profits taken out of the business in addition to the salary) are not. The key term here is “reasonable salary.” The IRS expects the salary to align with what others in similar roles would earn for similar work. Underpaying oneself to avoid taxes can attract IRS scrutiny.

The potential tax saving comes from the distributions not being subject to self-employment tax (which today is 15.3% for Social Security and Medicare). This can represent a significant saving, especially at higher income levels. But you should also remember that this is subject to how the Social Security portion of self-employment taxes is capped. For 2023, for example, only the first $160,200 of income is subject to the 12.4% Social Security tax (this base is $168,000 for 2024); income above this level is subject to only the 2.9% Medicare tax. This means the potential for tax savings with an S Corp election decreases once your income is above the Social Security wage base because the higher portion of the self-employment tax (Social Security tax) no longer applies.

Also, remember that additional costs and administrative requirements are associated with maintaining S Corp status, such as payroll processing and potential state-level taxes and fees. So, ensure you compare fully to understand if this makes sense.

As tax laws can be complex and subject to change, it’s always advisable to consult with a tax professional or CPA to understand the specific implications for your situation and ensure compliance with IRS guidelines.

The restrictions described above applicable to corporations also apply to LLCs that make an S corp election. Also, if the owners aren’t paid reasonable salaries, the IRS can invalidate the S corp election, requiring the payment of back taxes and penalties.

Most investors strongly prefer C Corps to LLCs or LLCs that make an S Corp election. So, if you’re creating a company and know you will need outside investors, consider the challenges of raising funding with a business structure that your investors will not prefer.

Pros for S corp election for LLC:

• All the benefits of an LLC.
• A possible lower tax rate by avoiding some payroll taxes for the owners.

Cons for S corp election for LLC:

• Limited ownership rules.
• Extra paperwork.
• Strict regulation.
• Penalties, if not correctly implemented.

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2. General Partnership (GP)

General partnerships allow for two or more business owners, also considered ‘partners.’

A general partnership, like a sole proprietorship, is the default ‘legal entity’ if two or more people join together to conduct business without registering with the state. Under this structure, a company cannot issue any stock, and partners are held personally liable for any taxes or debts.

There is no legal separation between individual assets and business assets. Additionally, like a sole proprietorship, the partnership dies when one or more of the partners exits the partnership. However, provisions can be made as long as two or more partners remain in the business.

Pros of general partnership:

• Ease of establishment. Setting up a general partnership involves minimal fees and paperwork. For instance, two chefs opening a pop-up restaurant can quickly establish a general partnership without the complex formalities required by other entities.
• Management flexibility.  Partners have the freedom to define their roles and management structure. In a boutique marketing firm, partners can tailor their involvement and decision-making processes to suit their expertise and preferences.

Cons of general partnership:

• Instability upon partner exit. T he departure or death of a partner can dissolve the partnership. If one of the partners in a law firm exits the business, the firm may need to be re-established under a new agreement.
• Joint and several Liability.  All partners share responsibility for the business’s debts and legal issues. In a construction partnership, if one partner incurs a debt, all partners might be held accountable.
• Shared liability for partners’ actions.  Each partner is liable for the actions of their co-partners. For example, if one partner in a consultancy firm engages in malpractice, all partners may face legal repercussions.
• Personal asset risk.  Partners’ personal assets, such as homes and savings, could be at risk in the event of the business accruing debts or facing lawsuits. This lack of protection is a significant drawback compared to LLCs or corporations.

3. Limited Partnership (LP)

Limited Partnerships (LPs) share similarities with General Partnerships, such as being owned by two or more individuals and benefiting from pass-through taxation, meaning the business itself isn’t taxed; instead, profits and losses pass through to the partners’ personal tax returns.

The pivotal distinction lies in the role of limited partners. Unlike in GPs, where all partners share equal liability, limited partners in an LP enjoy protection from the business’s debts beyond their investment amount.

Consider the case of a boutique design firm, where one partner handles creative direction while the other manages finances. If structured as an LP, the financial partner could be a limited partner, minimizing liability in case of legal issues related to design decisions.

A potential drawback is that limited partners often relinquish control over daily operations. For someone invested in the company’s direction, this lack of influence can be a source of frustration.

Every LP must have at least one general partner who bears unlimited liability. This means they’re fully responsible for the business’s debts and obligations. For instance, in a restaurant LP, the general partner might run the day-to-day operations, fully accountable for any operational liabilities.

LPs balance protection and control, making them a compelling choice for many entrepreneurs. But if you won’t be comfortable with limited control, consider whether this business structure is right for you. I’ve counseled many people frustrated with an LP because of this limitation.

Pros of limited partnership:

• Limited liability for limited partners. For instance, in a tech startup LP, a limited partner who invests in the company doesn’t risk personal assets beyond their investment if the startup faces legal trouble.
• Flexibility in management. Consider a family-owned vineyard operating as an LP. Family members can choose to be limited partners, investing in the business without being involved in the day-to-day management, allowing a professional manager to take the reins.
• Attracting investors. An LP structure can be attractive to silent investors. For example, an app development LP might appeal to investors who prefer to fund the business without getting involved in the coding and design decisions.

Cons of limited partnership:

• Limited influence for limited partners. In a real estate LP, a limited partner might feel frustrated by their lack of influence over property management decisions despite their financial stake in the properties.
• Unlimited liability for general partners. In a restaurant LP, the general partner could face personal financial ruin if the business fails, as they’re personally liable for all business debts.
• Complexity and formality. Setting up an LP can be more complex and formal than a general partnership. For instance, a consulting firm LP would require a formal partnership agreement, registration with the state, and adherence to ongoing compliance requirements, unlike a simpler GP structure.

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4. Limited Liability Partnership (LLP)

Limited Liability Partnerships (LLPs) are a hybrid of GPs and LPs, typically owned by professionals, like lawyers or accountants, who benefit from pass-through taxation. This means the income from the LLP is taxed only at the individual partners’ tax rates, not at the business level. This structure requires a partnership agreement. When I was an attorney before founding crowdspring in 2007, I was a partner at two law firms, and both were structured as LLPs.

A distinctive feature of LLPs is that while partners are responsible for their own actions, they are not personally liable for the conduct of their partners or the business’s debts and damages. This provides a protective shield for personal assets.

For example, in a law firm structured as an LLP, if one partner is sued for malpractice, the other partners’ personal assets are generally protected. Similarly, in an architecture LLP, one partner’s mistake in a project doesn’t financially jeopardize the other partners.

Pros of limited liability partnerships:

• It is simple to form, and paperwork is minimal.
• LLPs permit an unlimited number of partners.
• Personal liability protection. Individual partners in a consulting LLP are protected from liabilities arising from other partners’ mistakes or negligence.
• Flexibility in taxation. An accounting firm operating as an LLP enjoys the flexibility of distributing profits among partners in varying proportions without the constraints of stock structures.
• Autonomy in management. Partners in a medical practice LLP can manage their individual practices within the larger partnership structure, enjoying collaboration and independence.

Cons of limited liability partnerships:

• Active participation of partners in the business is required.
• LLPs can’t issue stocks.
• All partners share personal liability for any malpractice claims against the business.
• Restricted availability. LLPs are not universally available to all businesses. They’re typically reserved for licensed professionals like lawyers, accountants, and architects. A tech startup or a restaurant, for example, wouldn’t qualify for an LLP structure.
• Varying state regulations. An engineering firm LLP must navigate different regulations and requirements depending on the state of operation, which can complicate interstate business activities.
• Public disclosure requirements. A marketing agency operating as an LLP may need to disclose financial and operational details to the public, unlike a more private GP or LP, potentially exposing sensitive business information.

5. Sole Proprietorship

A Sole Proprietorship may be the best fit for solo entrepreneurs. The owner and the business are considered the same for legal and tax purposes.

A sole proprietorship is the default entity type when one owner starts a business. Unlike LLCs or Corporations, states do not require you to file your business initially or file periodic reports if you want to operate a sole proprietorship. The downside is that the owner is liable for all losses, legal issues, and debts the business accrues. There is little-to-no distinction between the entity and the business owner.

Examples of Sole Proprietors include freelancers, artists, consultants, virtual assistants , and other home-based owners who have not formally registered as an LLC or corporation.

I strongly urge people to avoid this type of structure unless they don’t have the budget to create an LLC or another structure with personal liability protections. For most people, the risks of personal liability in a sole proprietorship outweigh the benefits.

Pros of a sole proprietorship:

• Simplicity in formation. Establishing a sole proprietorship is straightforward, often requiring no more than a business license. An individual starting a business can do so quickly and with minimal bureaucratic hurdles.
• Minimal state paperwork.  Unlike corporations or LLCs, sole proprietorships aren’t typically required to file separate state paperwork or annual reports. A freelance photographer, for example, doesn’t need to file complex documents to maintain their business status.
• Complete control.  The owner has full autonomy in making business decisions. A personal trainer operating as a sole proprietor can choose their clients, set their schedule, and change their services as they see fit without consulting others.

Cons of a sole proprietorship:

• Personal liability exposure. The owner is personally responsible for all business debts and legal obligations. If a sole proprietor’s bakery incurs debt, the owner’s personal assets, like their home, could be at risk.
• Challenges in raising funds.  Sole proprietorships may find it difficult to raise capital since they can’t issue stock, and lenders may perceive them as riskier. A solo software developer might struggle to secure investment for expansion compared to a registered corporation.
• Business continuity concerns. The business is tied to the owner, so if the owner retires, passes away, or decides to close the shop, the business typically ceases to exist. An artisanal coffee shop might close its doors permanently if the owner decides to retire.

6. C Corporation (C Corp)

Like an LLC, a Corporation protects your personal assets from business debts. Depending on the tax structure, a Corporation can be a C-corp or an S-corp.

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Small corporations that meet specific IRS requirements may choose the S-corp status (see below) for pass-through taxation. Larger businesses and startups eyeing venture capital typically opt for C-corps.

C corp is what most people think of when they hear the word ‘corporation.’ Most large companies are filed under this structure, as it offers the most asset protection and tax-related options for business owners. It is also typically the only choice for owners who would like to be taxed separately from their company, is the legal entity preferred by nearly all investors, and is the most common structure for publicly traded companies on the stock exchanges.

When I started a company and knew that I would need investor capital, I have always used the C Corp structure. It eliminates friction with potential investors and ensures that you already have the required structure to bring on investor financing. The alternative often requires you to change your existing structure from an LLC to a C Corp before investors will fund your venture.

But, a C corp structure isn’t the best choice for everyone. Filing as a C corp requires more paperwork and formal processes that must be carefully and regularly filed. C corps are often also more closely monitored than other types of businesses because they are one of two types of corporations that can issue stock to the public.

If you choose to form a C Corp, be sure that your state of formation is business-friendly and has a strong reputation for quick filings. I’ve had situations where transactions required same-day filing and confirmation, and they would have been a nightmare had we not incorporated in Delaware. This is one reason Delaware remains the most popular state in the U.S. to form a corporation.

Pros of a C corporation:

• Personal liability protection.  Shareholders of a C corporation are not personally liable for business debts or legal actions. For example, if a tech corporation faces a lawsuit, the personal assets of its shareholders are generally not at risk.
• Perpetual existence. C corporations continue to exist beyond the lifespan or departure of their founders or shareholders. This means a manufacturing corporation can continue operations indefinitely, even if its original owners retire or pass away.
• Unlimited shareholders.  C corporations can have an unlimited number of shareholders, allowing for significant growth and investment opportunities. This is ideal for large businesses like multinational retail chains that require extensive capital investment.

Cons of a C corporation:

• Double taxation. Profits of a C corporation are taxed at both the corporate level and again as dividends to shareholders. This means a profitable software corporation might pay taxes on its earnings, and its shareholders also pay taxes on the dividends they receive.
• Complex formation and maintenance.  Establishing and running a C corporation involves considerable paperwork, formalities, and compliance with regulatory requirements. For a startup biotech company, this might include drafting bylaws, holding regular board meetings, and maintaining detailed records.
• Shareholders’ limited influence.  While shareholders in a C corporation are protected from personal liability, they may have limited control over day-to-day business decisions, especially in large corporations where management and ownership are separate. For instance, individual shareholders of a global fast-food corporation likely have little say in its daily operations.

7. S Corporation (S Corp)

An S corp is an election a company can choose when they form an LLC or a C Corp. Making your S Corp election does not impact the personal liability protections of forming an LLC or corporation.

It is usually done for tax advantages, but before you decide to make the S corp election, you must understand the benefits and some of the limitations it may put on your corporation or LLC .

A few differences exist between businesses that opt for an S corp election and those that form a C Corp, or Inc., without the election.

Owners of an S corp can claim operational losses as part of their personal income should the business fail to turn a profit.

An S corp can also help business owners avoid what is referred to as the ‘double taxation’ issue impacting C Corps. With C Corps, taxes are imposed on the profits at the corporate level. Then, when the profits (after payment of taxes) are passed down to the owners, they also have to pay taxes on their dividends.

S corps are treated more like partnerships in that all profits or losses are passed through to the owners and aren’t taxed at the corporate level. Thus, the profits are only taxed once.

Making the election does put some restrictions on a C Corp. For example, all business owners of S Corps must be U.S. citizens, which can limit international growth. Moreover, the shareholders are limited in number and type when you make an S corp election. You cannot have over 100 shareholders; most incorporated entities cannot be shareholders.  Finally, only one class of shares can be in an S corp.

Pros of an S corp:

• Liability protections. S corporations enjoy the same personal liability protections as C corporations. Shareholders of an S corp in the tech industry, for instance, aren’t personally liable for business debts or legal actions against the corporation.
• Tax benefits.  S corporations avoid the double taxation typically seen in C corporations. Profits and losses can pass directly to shareholders’ personal tax returns, potentially resulting in a lower overall tax rate. This is beneficial for a small marketing firm looking to maximize its earnings.

Cons of an S corp:

• Restrictions on ownership.  S corps face limitations on the number and type of shareholders. For example, an S corp is limited to 100 shareholders, who must be U.S. citizens or residents, which could hinder investment prospects for a growing startup.
• Increased paperwork and formalities.  Running an S corp requires adherence to strict procedural formalities. This might involve maintaining detailed corporate minutes and bylaws and holding regular board meetings, which can burden a small design studio.
• Rigorous IRS oversight.  S corporations are subject to strict IRS regulations to ensure they meet the criteria for this designation. This means an S corp in the restaurant industry must be diligent in its compliance to avoid penalties or loss of its S corp status.

8. Nonprofit

Nonprofits operate for charitable, educational, scientific, religious, or cultural purposes. They are designed to serve the public good rather than generate profit for owners or shareholders. To be recognized as a nonprofit, an entity must be established with a clear mission that benefits the community or the public.

Examples of nonprofits include charitable organizations like the American Red Cross, educational institutions like Harvard University, and cultural institutions like the Metropolitan Museum of Art. Each serves a distinct public purpose and is structured to prioritize that mission over profit.

But think carefully about whether this is the right structure for you. Some entities like OpenAI started as nonprofit but were forced to create other for-profit structures after discovering that they would need to raise massive capital, and that would not have been possible with a nonprofit status.

To form a nonprofit, founders typically incorporate the organization in their state, similar to a corporation. The process involves:

• Creating a Board of Directors.  Nonprofits are governed by a board of directors who oversee the organization’s activities and ensure it stays true to its mission. For instance, a nonprofit focusing on environmental conservation would have a board that might include scientists, activists, and policy experts.
• Drafting bylaws. Bylaws are the internal rules that govern the nonprofit’s operations, including board meetings, decision-making processes, and membership guidelines. A nonprofit dedicated to literacy might have bylaws detailing how to select educational programs and distribute resources.
• Applying for tax-exempt status.  In the United States, nonprofits often apply for 501(c)(3) status with the IRS, which exempts them from federal income tax and allows donors to claim tax deductions. The application process requires detailed information about the organization’s purpose, finances, and governance.

Pros of nonprofits:

• Tax exemptions. Nonprofits enjoy tax-exempt status, meaning they don’t pay federal income tax on money they earn related to their nonprofit purpose. For instance, an animal shelter registered as a nonprofit wouldn’t pay taxes on donations received or funds raised through charitable events.
• Liability protections.  Similar to corporations, nonprofits offer personal liability protection for directors and officers. This means that if a nonprofit environmental organization faces a lawsuit, the personal assets of its board members are generally protected.

Cons of nonprofits:

• Restrictions on profit distribution.  Any profits generated must be reinvested into the organization’s mission and cannot be distributed to founders or members. If an educational nonprofit earns revenue from workshops, those funds must be used to further educational programs, not paid out to organizers.
• Challenges in raising capital.  Nonprofits often face difficulties securing traditional financing like bank loans, as they lack equity and profit distribution. They rely heavily on donations and grants, which can be unpredictable. A nonprofit art gallery might struggle to expand due to these financial constraints.
• Regulatory paperwork. Establishing and maintaining a nonprofit requires significant paperwork, including applying for tax-exempt status, filing annual returns (Form 990), and adhering to state and federal regulations. This can be cumbersome for a community health clinic focusing on patient care.

9. Co-operative

Much like a Sole Proprietorship is a natural fit for solo entrepreneurs, a co-operative (or co-op) might be the ideal structure for groups seeking a business model based on shared ownership and democratic control.

In a cooperative, members are both the owners and the customers, creating a unique environment where the business’s success directly benefits those involved. Unlike corporations, where decisions are often made at the top, co-ops operate on a one-member, one-vote principle, ensuring equal say in key decisions.

Examples of co-operatives include worker-owned businesses, agricultural co-ops where farmers pool resources, and housing co-ops managed by residents. These entities range from small community-based organizations to large businesses like credit unions or retail chains.

Co-operatives are not very popular in the U.S. I’ve dealt with some here (mostly real estate and farming co-operatives). This structure is more popular in European countries like Italy.

Pros of co-operatives:

• Democratic governance. Members have an equal say in the business, fostering a sense of ownership and collaboration. In a worker-owned bakery, for instance, all members can vote on major decisions, from supplier choices to profit distribution.
• Shared economic benefits. Profits are distributed among members, often based on their involvement or investment in the co-op. A farmer’s co-op, for example, might share profits based on each farmer’s contribution of produce.
• Community focus. Co-ops often focus on community development and social goals, attracting customers and members who support these values. A community bookstore co-op might host local events and literacy programs, strengthening neighborhood ties.

Cons of co-operatives:

• Complex decision-making. The democratic process can be slow, and reaching a consensus among all members can be challenging. A co-op art collective might struggle to agree on which exhibitions to host, delaying programming decisions.
• Limited investment opportunities. Co-ops may find it harder to raise capital since they can’t issue stock in the same way as corporations. This could hinder growth prospects, as seen in a tech co-op seeking to expand its software offerings.
• Member turnover. Member commitment can vary, and turnover can impact continuity and operations. A housing co-op might face challenges maintaining consistent governance and property management due to fluctuating membership.

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10. B Corporation

While Sole Proprietorships cater to individual entrepreneurs and co-operatives to member-based groups, B Corporations (or B Corps) are designed for companies driven by profit and social responsibility. B Corps are certified by a nonprofit entity, B Lab, and are recognized for meeting rigorous standards of social and environmental performance, accountability, and transparency.

Unlike traditional businesses prioritizing profit maximization, B Corporations balance profit with purpose, aiming to benefit all stakeholders – employees, communities, and the environment, not just shareholders.

Examples of B Corporations include well-known consumer brands, sustainable manufacturers, and social enterprises. These businesses range from organic food companies committed to fair trade practices to tech firms focused on environmental innovation. These include:

• Patagonia : A well-known outdoor clothing and gear company that is committed to environmental sustainability and ethical manufacturing practices.
• Ben & Jerry’s : The iconic ice cream company is known for its commitment to social justice, environmental causes, and sustainable sourcing of ingredients.
• Seventh Generation : A company that produces eco-friendly cleaning and personal care products focusing on sustainable practices and ingredient transparency.
• Etsy : An online marketplace for handmade and vintage items, Etsy is committed to social impact and empowering micro-entrepreneurs worldwide.
• Kickstarter : The popular crowdfunding platform is a B Corporation committed to helping bring creative projects to life while promoting a more sustainable and equitable economy.
• Allbirds : A footwear company that uses natural and sustainable materials to produce shoes, strongly committed to reducing its carbon footprint.
• Danone North America : One of the largest Certified B Corporations, Danone North America focuses on healthful foods and sustainability, including efforts to reduce waste and promote regenerative agriculture.

These companies have undergone the rigorous B Corp certification process and have committed to higher standards of social and environmental performance, accountability, and transparency.

Pros of B corporations:

• Enhanced credibility. B Corp certification signals a commitment to social and environmental ethics, often leading to increased trust among consumers, employees, and investors. An eco-friendly clothing brand with B Corp certification can leverage its status to attract conscious consumers.
• Attracting talent and investment. A strong social mission can attract top talent and socially responsible investors. A B Corp developing renewable energy solutions might draw employees passionate about sustainability and investors interested in green technologies.
• Market differentiation. Standing out in a crowded market is easier for B Corps due to their verified ethical practices. A B Corp coffee shop sourcing fair-trade beans can distinguish itself from competitors who don’t prioritize ethical sourcing.

Cons of B corporations:

• Certification process. Achieving B Corp certification requires meeting high standards and undergoing a rigorous assessment, which can be time-consuming and complex. A small social enterprise may find the certification process resource-intensive.
• Ongoing transparency. B Corps must maintain transparency and continue to meet the high standards set by B Lab, which can be demanding. A B Corp providing clean water solutions must regularly report on its impact, which can be administratively burdensome.
• Potential for higher costs. Commitment to social and environmental responsibility can result in higher operational costs. A B Corp using sustainable materials for its products may face higher production costs than competitors using cheaper, non-sustainable materials.

11. Joint Venture

A Joint Venture (JV) is a strategic alliance where two or more parties, typically businesses, agree to collaborate on a specific project or business activity while remaining distinct entities. Joint ventures are established by mutual agreement and are often used to leverage complementary strengths, share risks, and capitalize on new market opportunities.

Unlike co-operatives, which are member-owned and democratically controlled, joint ventures are usually formed for a specific purpose and duration, with control and profits shared according to the JV agreement.

Examples of Joint Ventures include technology firms partnering on research and development, real estate companies co-developing properties, or multinational corporations entering new markets through partnerships with local businesses.

Pros of a Joint Venture:

• Combined resources and expertise. Joint ventures bring together diverse resources and expertise. For instance, a tech startup might partner with an established electronics manufacturer to develop a new gadget, combining innovative design with production capabilities.
• Shared risk. By pooling resources, JV partners share the financial and operational risks. If two companies collaborate on exploring a new oil field, they mitigate individual risk exposure by sharing the investment and operational responsibilities.
• Access to new markets. A JV can provide access to new markets and customers. A domestic food brand entering a foreign market might form a joint venture with a local distributor to leverage its market knowledge and networks.

Cons of a Joint Venture:

• Complexities in management. Aligning the interests, cultures, and management styles of JV partners can be challenging. A JV between an established corporation and an agile startup might face conflicts due to differing corporate cultures and decision-making processes.
• Limited control. Partners in a JV may have to compromise on autonomy in exchange for shared control. A software company in a JV might have to adjust its product development timelines to align with its partner’s marketing strategies.
• Dependency risks. Joint ventures can lead to dependency on the partner, which can be risky if the partner faces financial or operational issues. If one partner in a JV providing cloud services faces a data breach, it could negatively impact the reputation and operations of the other partner as well.

Other vital considerations related to your business structure

As we wrap up our discussion on business structures, let’s make sure we’re crystal clear on how your chosen structure interplays with aspects like insurance coverage, liability exposure, business expansion plans, and tax implications.

The insurance influence

Your business structure significantly determines what kind of insurance coverage you need. For instance, you might only require basic liability insurance as a sole proprietor. However, if you form a corporation, you may need to consider additional policies like directors’ and officers’ liability insurance. It’s like buying a bigger, fancier house—you’d need to upgrade your home insurance too.

The liability link

Depending on your chosen business structure, your personal assets could be at risk or safely tucked away. For example, if you’re a sole proprietor, your personal and business assets are considered the same. Your personal assets could be on the line if the company goes south. But if you’re an LLC or a corporation, your personal assets typically enjoy a protective buffer from business liabilities. It’s like wearing a raincoat—you stay dry even when it’s pouring on your business.

Expansion and business structure

Think of your business structure as the vessel for your entrepreneurial journey . Some vessels are great for calm lakes, others for raging oceans. If your ambitions include expanding beyond borders or going public, a more complex structure like a corporation would be suitable. It’s structured to facilitate growth and handle the rough and tumble of large-scale operations.

Taxation Ties

Finally, your business structure decides how Uncle Sam gets his share. Taxes might seem like a dry subject, but being prepared can save you a lot of headaches down the line. Understand your liabilities, be they income tax, self-employment tax, sales tax, property tax, or others, and factor them into your financial planning.

A sole proprietorship or an LLC involves pass-through taxation—you report business income or losses on your personal tax return. In contrast, a C-corporation undergoes what’s known as double taxation—profits are taxed at the corporate level and then again at the individual level when distributed as dividends.

Essentially, your business structure is like a cookbook, dictating the recipe for your tax preparation.

Structuring for succession planning

No matter your business structure, you should plan for the future. This could involve grooming a successor, planning to sell the business, or setting up a family trust.

Remember, it’s not a one-size-fits-all approach. You should choose the business structure that best suits your needs, and don’t be afraid to adapt as your business grows and changes. Reviewing your business structure regularly is a good idea to ensure it’s still the best fit.

Before settling on a business structure, it’s advisable to consult a small business accountant or lawyer, considering each business structure has unique tax implications that can significantly affect your profitability.

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Frequently Asked Questions (FAQs) about business structures

1. what are the key differences between a sole proprietorship and an llc.

A sole proprietorship is the simplest form, with no legal distinction between the owner and the business. It’s easy to set up but offers no liability protection. An LLC (Limited Liability Company) provides liability protection, separating personal assets from business debts, but it involves more paperwork and formalities.

2. What is a partnership, and how does it differ from an LLC?

A partnership involves two or more individuals doing business together. Profits and losses are shared, and partners are personally liable for business debts. An LLC can also have multiple members but provides liability protection and more flexibility in management and profit-sharing.

3. What are the advantages of incorporating a business?

Incorporating a business, either as a C corporation or an S corporation, provides liability protection, potential tax benefits, and easier access to capital. Corporations can issue stock, which is attractive to investors. However, they also face stricter regulations and more complex tax requirements.

4. How do taxes differ between a sole proprietorship, partnership, LLC, and corporation?

Sole proprietorships and partnerships are pass-through entities; profits are taxed as personal income. LLCs can choose to be taxed as a pass-through entity or as a corporation. C corporations are taxed separately from the owners, while S corporations are pass-through entities but must meet certain IRS requirements.

5. What is an S corporation, and how is it different from a C corporation?

Both are corporations, but an S corporation has elected a special tax status with the IRS, allowing profits to be passed through directly to owners’ personal income without facing corporate tax. S corporations have restrictions on the number and type of shareholders.

6. Can an LLC have an unlimited number of members?

Yes, an LLC can have an unlimited number of members unless it elects to be treated as an S corporation for tax purposes, which imposes a limit on the number of members.

7. What is a nonprofit organization, and how does it differ from other business structures?

A nonprofit organization is dedicated to furthering a social cause or shared goal. It’s eligible for tax-exempt status because it doesn’t distribute profits to owners or shareholders. Nonprofits can still generate revenue, but they must support their mission.

8. How complex is it to form and manage a corporation compared to an LLC?

Forming and managing a corporation is generally more complex and costly than an LLC. Corporations require articles of incorporation, bylaws, regular board meetings, and more rigorous record-keeping. LLCs are more flexible and require fewer formalities.

9. Are there any business structures that offer more flexibility than others?

LLCs are known for their flexibility. They offer liability protection while allowing for flexibility in management, profit distribution, and less formal operational requirements.

10. What business structure is best for raising capital?

Corporations, particularly C corporations, are typically the best structure for raising capital. They can issue multiple classes of stock, which is attractive to venture capitalists and investors.

11. Can a single person form a corporation?

Yes, a single person can form a corporation. Many states allow the formation of “single-shareholder” corporations, where one person is the sole shareholder, director, and officer.

12. Do all business structures require registration with the state?

Most do, especially formal structures like LLCs, partnerships, and corporations. Sole proprietorships may not require state registration, but they may need local licenses or permits to operate.

13. Is it possible to change the business structure after formation?

Yes, businesses can change their structure as they grow and evolve. For example, a sole proprietorship can be converted into an LLC or a corporation, but this process involves legal paperwork, potential tax implications, and possible fees.

14. How does liability protection differ across business structures?

Sole proprietorships and partnerships offer no liability protection—owners are personally liable for business debts. LLCs and corporations provide liability protection, shielding personal assets from business debts and legal judgments.

15. Are business structure decisions permanent?

No, business structures can be changed, but it’s advisable to choose the most suitable structure from the start to avoid unnecessary complexities and costs.

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