Sole Proprietorship

A sole proprietorship is the default business structure. If you start a business in the United States and do not form an LLC, corporation, or another legal entity, you are automatically a sole proprietor. There is nothing you have to do to become one.

But simplicity comes with a cost. There is no registration, no filing, and no paperwork with any state. That also means there is nothing to stop a creditor or plaintiff from going after your personal assets. Your bank account, house, car, and everything else you own is exposed to business debt and lawsuits. That liability exposure is why other structures like LLCs exist.

This page covers what you need to know about taxes, registration, and EINs for a sole proprietorship. If you need legal protection instead of simplicity, you should form an LLC or corporation.

How a sole proprietorship is created

There is no process to register a sole proprietorship in any U.S. state.

You do not file Articles of Organization or Incorporation. You do not choose a business name on any state form. You do not get permission from anyone. Delaware, Wyoming, California, and all other states have no "sole proprietorship registration" process.

A sole proprietorship is created the moment you begin operating a business. The business is treated as an extension of your personal name, not as a separate legal entity. There is nothing to register because there is no entity to register.

This is intentional. The law assumes that if you are operating a business without forming a separate structure, you are just doing business as yourself. So the state has nothing to record.

That lack of registration is the core difference from an LLC or S-corporation, both of which require you to file something with the state. A sole proprietorship requires you to file nothing.

Reporting business income: Schedule C

Your sole proprietorship does not have its own tax return. Instead, you report business income on your personal return.

You file Form 1040, which is the standard personal income tax return for U.S. residents. Along with Form 1040, you also file Schedule C, which reports your business income and deductions.

Schedule C asks you to report the following:

• Gross income from your business.
• Cost of goods sold (if you sell products).
• Business expenses (rent, supplies, advertising, insurance, and so on).
• Net profit or loss.

The net profit or loss from Schedule C becomes part of your income on Form 1040. You then pay personal income tax on that amount. You do not pay corporate tax rates.

You also owe self-employment tax on the profit, which covers your Social Security and Medicare contributions. You report it on Schedule SE, which is a separate schedule from Schedule C. The self-employment tax rate is 15.3 percent (12.4 percent Social Security plus 2.9 percent Medicare), and it applies to 92.35 percent of your net business profit rather than the full amount. You must file Schedule SE if your net earnings from self-employment are $400 or more.

There is no separate business tax return like a corporation files (Form 1120). Everything flows through your personal return.

When you need an EIN

An EIN is a nine-digit number the IRS uses to identify a business for tax purposes.

You must get an EIN if you:

• Hire employees (you need it for payroll tax reporting).
• Owe employment or excise taxes, or taxes on alcohol, tobacco, and firearms.
• Withhold taxes on income, other than wages, paid to a non-resident alien.
• Set up a Keogh plan or solo 401(k).
• Buy an existing business or take it over.
• File for bankruptcy.

You do not need an EIN if:

• You work alone, have no employees, and owe none of the taxes above.
• You use your personal Social Security Number to file Schedule C.

State sales tax registration is not on the IRS list. The IRS is explicit that if you do not need an EIN for federal tax purposes, you can still request one for banking or state tax purposes. Some states and banks will ask for one even though the IRS does not require it.

Applying for an EIN costs nothing. The IRS provides an online application tool on IRS.gov. But that tool requires the applicant to have an SSN or ITIN. If you do not have either, you must use a different path, which we cover below.

When you need a business license

Many states, cities, and counties require businesses to get a local business license. This is separate from forming a business structure.

A business license is not the same thing as forming an entity. It does not create a company, and it is not the "registration" that an LLC filing is. But do not assume licensing is purely local. Some states license at the state level too, and a few of those licenses reach sole proprietors directly. Nevada is the clearest example: NRS 76.100 requires a person to obtain a state business license from the Secretary of State before conducting business, and the Secretary of State applies that to sole proprietors who file no formation documents. Washington runs a statewide business license application as well.

So the licenses that may apply to you can come from a city, a county, a state, or more than one at once. Some cities require a license from any business generating income. Others only ask it of certain business types. Fees vary widely and change by administrative action, so we do not quote them here. Check your city and county clerk's website and your state's business licensing page for the current fee schedule.

🇺🇸 If the IRS counts you as a U.S. person

You can operate as a sole proprietor with the standard process.

If you need an EIN, apply online through IRS.gov. The application takes a few minutes. Once you have your EIN, you provide it to employers (if you hire people), to banks and payment processors, and to customers who request it.

When tax time comes, file Schedule C along with your Form 1040. Your business income is taxed at your personal income tax rate.

That is the complete process on the federal side. You do not file a separate business return. You file no formation documents with any state. The only federal paperwork is Schedule C and Schedule SE. Licensing is a separate question: depending on where you operate, a city, county, or state business license may still apply.

🌏 If it does not

If you are not a U.S. person for tax purposes, three things change: liability protection, obtaining an EIN, and what you file for taxes.

Liability protection

There is no difference here. You are still a sole proprietor with no legal separation between you and your business. Your personal assets are fully exposed to business debt and lawsuits. That is true whether you are a U.S. person or not.

Getting an EIN

The IRS has an online tool on IRS.gov for applying for an EIN. That tool requires the person applying to be able to provide an SSN or ITIN. If you are a non-resident without a U.S. tax identification number, you cannot use it.

You must apply by mailing or faxing Form SS-4 to the IRS instead. This form asks for information about the responsible party (the person running the business). Line 7a is the responsible party's name. Line 7b is the responsible party's SSN, ITIN, or EIN. If you do not have one and are not eligible to obtain one, the SS-4 instructions tell you to enter "foreign" (or "N/A") on line 7b. Do not leave it blank.

Mailing or faxing Form SS-4 is slower than using the online tool. You typically wait a few weeks to receive your EIN. You will need the EIN before you can open a business bank account or file your taxes with the IRS.

What you file for taxes

If you are engaged in a trade or business in the United States, you file Schedule C with Form 1040-NR (the tax return for non-residents) instead of Form 1040.

Form 1040-NR still requires a taxpayer identification number. An EIN identifies your business, but it does not identify you on your personal return. For that you need an SSN or an ITIN. If you have neither, you apply for an ITIN with Form W-7, which you can file together with your tax return.

Self-employment tax

This is where the lanes actually split, and the split runs in your favor.

Under IRC §1402(b), self-employment income does not include the earnings of a nonresident alien individual. Nonresident aliens are therefore not subject to self-employment tax. The 15.3 percent that a U.S. person owes on Schedule SE does not apply to you.

The exception is a Totalization Agreement. If an international social security agreement between the United States and your country places you under the U.S. social security system, then you do owe self-employment tax. Check whether your country has one.

Note that this exemption is about self-employment tax only. It does not exempt you from income tax on income effectively connected with a U.S. trade or business.

How the rules differ

The core difference is not whether you can run a sole proprietorship. Both groups can. The differences are the process of getting an EIN, which return you file, and whether self-employment tax applies.

Common mistakes

🇺🇸 If the IRS counts you as a U.S. person

• Assuming you can use any business name you want without registering it. You can choose a business name (called "Doing Business As" or "DBA"), but most cities and counties require you to register that name locally, even for a sole proprietorship. The process is different from forming an LLC, but it is usually still required.
• Not getting an EIN when you should. If you hire employees or have certain other business obligations, the IRS requires an EIN. Using only your SSN when you should have an EIN can cause problems with payroll systems and IRS reporting.
• Mixing up sole proprietor status with self-employed status. Not everyone who works for themselves is a sole proprietor. An owner who runs the business through an LLC or a corporation is not one, and an S-corporation shareholder who works for the company is paid W-2 wages rather than self-employment income.

🌏 If it does not

• Thinking that you do not need to file taxes because you have no EIN. You do. If you are engaged in a U.S. trade or business, you file Schedule C with Form 1040-NR.
• Assuming a passport number can stand in for a taxpayer identification number. It cannot. Form 1040-NR requires an SSN or an ITIN. An EIN identifies the business, not you. If you have no SSN, apply for an ITIN with Form W-7.
• Paying self-employment tax you do not owe. Nonresident aliens are outside the definition of self-employment income under IRC §1402(b). Unless a Totalization Agreement covers you, Schedule SE is not yours to file.
• Trying to apply for an EIN online when you have no SSN or ITIN. The online tool will reject you. You must use Form SS-4 by mail or fax.
• Assuming that a sole proprietorship is cheaper than an LLC because it has no registration fee. If your business is sued, your house is exposed. The liability cost can far exceed the registration fee for an LLC.

FAQ

Is there any paperwork I have to file with the state to start a sole proprietorship?

There is no formation filing. No U.S. state has a process for registering a sole proprietorship into existence, so you can start one by simply beginning to operate a business. Licensing is a different matter. You may need to register a DBA name with your city or county, and you may need a business license from a city, a county, or in some states (Nevada, for example) the state itself. None of that creates an entity, but it can still be required.

Can I get an EIN if I do not have an SSN or ITIN?

Yes, but you cannot use the online application. You must complete Form SS-4 by mail or fax and write "Foreign" in box 7b. The IRS will send your EIN by mail after a few weeks.

Do I need an EIN if I am just starting and have no employees?

Not immediately. You can use your Social Security Number to file Schedule C if you meet these conditions: you have no employees, you do not owe excise tax, you do not own a Keogh plan or solo 401(k), you are not buying an existing business, and you are not filing for bankruptcy. If any of those change, you will need an EIN.

Can I be a sole proprietor if I am not a U.S. person?

Yes. There is no law that forbids non-residents from operating sole proprietorships. The complications are procedural: getting an EIN takes longer, and you need an ITIN to file. You also have the same liability exposure as any sole proprietor: your personal assets are fully exposed to business debt.

What happens to my sole proprietorship if I form an LLC later?

Legally, the LLC becomes the business and you stop operating in your own name. For taxes, less changes than people expect. A single-member LLC is a disregarded entity by default, and the IRS says its owner reports the business on Schedule C "in the same manner as a sole proprietorship," including self-employment tax. So if you form a single-member LLC and make no tax election, you keep filing Schedule C. The form changes only if you elect corporate or S-corporation treatment, or if the LLC has more than one member.

Is a sole proprietorship the same as being self-employed?

Not exactly. Self-employed means you work for yourself. A sole proprietorship is a specific status: you are in business with no legal separation between you and the company. Someone who runs the same business through a corporation is still working for themselves but is not a sole proprietor. The terms overlap but are not the same.

Do I have to choose a business name for a sole proprietorship?

Not with the state. Your sole proprietorship is identified by your personal name. Many sole proprietors choose a business name (a "Doing Business As" or "DBA" name), but you usually register that with your city or county, not your state. The requirements vary by location. You should check with your local government.