A sole proprietorship is the simplest type of business structure in the U.S., owned and operated by one person. It is not a separate legal entity, meaning the owner and the business are legally the same, and business income is reported on the owner’s personal tax return.
What is a Sole Proprietorship?
A sole proprietorship is the most straightforward way to operate a business in the U.S., requiring minimal setup and no formal registration with the state (beyond necessary licenses or permits). In this structure, there is no legal separation between the owner and the business. This means the owner is personally responsible for all profits, losses, debts, and liabilities. If the business is sued or owes money, the owner’s personal assets—such as bank accounts, real estate, or other property—can be at risk.
From a tax perspective, a sole proprietorship is considered a pass-through entity. The business does not file its own tax return; instead, the owner reports all income and expenses on their personal return, usually using Schedule C (Form 1040). This avoids the complexity of corporate tax filings but also means the owner pays self-employment tax on all net earnings.
For non-U.S. residents, operating a sole proprietorship in the U.S. is uncommon and often impractical. That’s because there is no separate legal entity, making liability protection nonexistent, and in many cases, non-residents cannot obtain the required work authorization to directly operate a U.S. sole proprietorship while physically in the country. Additionally, without a distinct business entity, it’s harder to open U.S. bank accounts, establish credit, or attract investors.
The differences between an LLC and a sole proprietorship mainly come down to liability protection, taxation, credibility, and formality. A sole proprietorship is the simplest and cheapest structure to start, often requiring little more than local permits, but it offers no legal separation between the business and the owner—meaning the owner is personally liable for all debts and legal claims. An LLC, on the other hand, is a separate legal entity that protects the owner’s personal assets from most business liabilities if managed properly. Both can have pass-through taxation, but an LLC also has the option to be taxed as a corporation. Sole proprietorships are easy and low-cost but can be risky and may lack credibility with banks, investors, or partners. LLCs require more paperwork and fees but provide liability protection, flexible taxation options, and are generally seen as more professional and better suited for growth.
Sole proprietorships are appealing for U.S.-based freelancers, consultants, or very small businesses because they are easy and inexpensive to start. Many simply begin doing business under their legal name, though they can also operate under a “Doing Business As” (DBA) name if desired.
While this structure has benefits—such as simplicity, direct control, and minimal paperwork—it also carries significant drawbacks, especially in terms of liability and credibility. Many entrepreneurs eventually convert to an LLC or corporation to gain legal protection and access to more business opportunities.
