What is a sole proprietor?

A sole proprietor (also known as a sole trader) is a person who runs their own business as an individual. A sole proprietor is often known as a freelancer or contractor.

A sole proprietorship is an unincorporated business structure and one of the simplest ways to start a business. In a sole proprietorship, one individual owns the entire company. This means they typically have full control of how the business is run and full autonomy when it comes to building the company’s brand.

A sole proprietor keeps all of the company’s profits after tax has been paid on them, rather than having to share profits with a partner or shareholders. They also accept sole liability for paying tax on their profits.

A sole proprietor is often the only person who works for the business. Hiring employees can be too complicated for a sole proprietor as it means that they would have to register as an employer and manage the payroll. They may, however, hire other sole proprietors to perform services for them.

Someone may become a sole proprietor alongside full- or part-time employment. In itself, this is perfectly legal as long as all profits are reported to the relevant tax authorities. Employers may, however, have issues with it. It’s strongly advisable to check this before starting a side-hustle.

As a sole proprietorship grows, it may be advantageous to restructure it as a limited liability company in line with the company’s expansion.

Sole proprietor examples

As we can see, the definition of a sole proprietor is more than just someone who sells shoes, although – puns aside – many smaller retailers are indeed set up as sole proprietorships.

Common examples of sole proprietors include:

Tradespeople

These include construction workers, gardeners, landscapers, carpenters, and plumbers.

Knowledge workers

Freelancers working in the digital and creative industries are often also sole proprietors. These include graphic designers, web designers and developers, copywriters, marketers, and social media specialists.

Gig-economy workers

Those who work in the gig economy are also typically sole proprietors, whether they manage their business alongside a day job or commit to it full time. This includes taxi drivers, couriers, delivery drivers, and tutors.

Workers in the beauty and wellness sector

Some of these sole proprietors go on to form successful brands and become limited companies. In fact, some of the biggest names in beauty and wellness started as sole proprietorships.

What to think about before becoming a sole proprietor.

Pros and cons of setting up your business as a sole proprietor

A sole proprietorship is advantageous because it is easy to set up and dismantle. Tax is often simpler to calculate for this business structure than for a partnership or incorporated company.

A sole proprietor in the US, for instance, can use their own social security number to pay SSN taxes rather than needing an employer identification number. Furthermore, the business owner is entitled to all of the profits that the company makes after tax.

However, as it is not registered, it lacks the government protection extended to an incorporated business.

Advantages

• quick and easy to set up
• easier tax with pass-through tax advantage in the US
• less administration
• lower costs

Disadvantages

• a sole trader has unlimited liability
• can be harder to raise business capital as a sole trader
• fewer tax planning opportunities as tax is paid on income in the same year it is earned

Frequently asked questions about sole proprietors

How does a sole proprietor pay their taxes?

A sole proprietor in the US must fill out Form 1040, Schedule C, and other forms on their tax returns every year.

How do I switch from sole proprietorship to a limited company?

A sole proprietor in the US needs to file articles of organization with their state secretary and obtain an employee identification number from the IRS.