Key Advantages of a Sole Proprietorship (2025)

Sole proprietorships account for 86.3% of all US businesses without employees on payroll—by far the most common business structure for entrepreneurs. Quick and inexpensive to establish, sole proprietorships are a popular choice for small businesses owned by one person.

If you’re starting a business, it’s helpful to know sole proprietorship is one of several available legal structures, including C corporation, S corporation, and limited liability company (LLC). The entity you pick affects how you pay taxes, the paperwork you’ll file, and whether you can attract investors or not.

While the advantages of sole proprietorship are numerous, there are downsides. Learn the advantages and disadvantages of a sole proprietorship to decide if it’s the right structure for your business.

What is a sole proprietorship?

A sole proprietorship is an unincorporated business owned by a single person. For legal purposes, the person who owns the business essentially is the business—there’s no separate entity. Sole proprietors are directly responsible for all profits, losses, liabilities, and legal requirements. 

Because of that, a sole proprietor has unlimited personal liability. That means your assets—your house and personal bank accounts—are at risk if you get into business debt or a claim is made against your company (e.g., through a lawsuit).

You do not have to carry on regular full-time business activities to run a sole proprietorship. Having a part-time business in addition to your regular job or business can also be considered self-employment.

Advantages of a sole proprietorship

1. Easy to establish
2. Full control for the owner
3. No corporate income taxes
4. Less costly than other business models
5. Tax advantages and reinvestment opportunities
6. Simple dissolution process

1. Easy to establish

A sole proprietorship is the simplest single-owner business structure—whether you sell products or services online or in person. You don’t need to incorporate, register your business, or get an employer identification number (EIN) to be a sole proprietor because sole proprietorship is the default structure. 

For that reason, it’s a great option if you’re starting a business with no money. (That said, you still need to apply for business licenses or seller's permits required by your state or profession.)

2. Full control for the owner

In a sole proprietorship, you’re the final decision‑maker on everything, from product launches to growth pace. That autonomy is what drew Ely Khakshouri, founder of outdoor gear brand Retrospec, to stay solo during his early years. 

“It was very important to me to retain equity, even if that meant growing a little bit slower at times and having some out‑of‑stock periods,” he says on a Shopify Masters episode. 

Because there are no partners, board members, or shareholders, you have full authority and responsibility for the business. Another one of the big advantages of sole proprietorship is you also keep 100% of the profits and can choose to hire employees or not. Although hiring does add complexity to financial reporting and tax filing, there’s no legal limit on the number of staff a sole proprietor can employ. 

3. No corporate income taxes

Instead of completing corporate income tax as large corporations do, sole proprietorships require owners only to pay their personal income taxes. Simply attach a Schedule C to your 1040 form, and you’re done.

4. Less costly than other business models

While sole proprietors must abide by state and federal licensing requirements, there’s less paperwork than other business structures, meaning fewer fees. 

For example, you don’t need to file Articles of Organization or Incorporation, which are required for LLCs and corporations, and can range anywhere from $35 to $500, depending on your state. 

Sole proprietors also don’t need to pay annual reports or franchise tax fees. These fees also vary by state. Delaware, for instance, charges a flat $300 franchise tax fee each year. 

5. Tax advantages and reinvestment opportunities

As a pass-through entity, a sole proprietorship lets you report business profits and losses on Schedule C. You avoid the double taxation that happens when corporations pay tax at the company and dividend level. 

As a sole proprietor, you may qualify for the Qualified Business Income (QBI) deduction. If your taxable income is less than $191,950 (single) or $383,900 (joint) in 2025, you may deduct up to 20% of net profit right off the top. But your self-employment tax remains at 15.3%, which you may be able to deduct half of to lower your effective rate. 

Some tax deductions you can potentially take advantage of are:

• Home office deduction. Claim $5 per square foot up to 300 square feet with a maximum write-off of $1,500. 
• Digital tools and subscriptions. Fees for Shopify apps, AI automation tools, and cloud software are fully deductible as “ordinary and necessary” business expenses. 
• Section 179 expensing for tech hardware and software. Expense up to $1.25 million of qualifying equipment or business software placed in service in 2025. 
• Advertising and creator partnerships. Ad spend, influencer fees, and content creation costs are all 100% deductible. 

💡Note: Sole proprietorships are generally beneficial for incomes in the 24% tax bracket (incomes below $103,350 single/$206,700 joint) or lower. The single-layer income tax, plus partially deductible self-employment tax, often falls below or near the effective rate for corporations. 

Above that bracket, your combined personal rate and self-employment tax can exceed what you’d owe through an S corp salary/distribution mix, which is one reason many solo founders switch to an LLC taxed as an S corporation once profits increase. 

6. Simple dissolution process

The process is straightforward if you decide to end your sole proprietorship business. And if you wish to restructure as a different business type, such as an LLC or S corporation, you can. 

Disadvantages of a sole proprietorship

1. Owner liability
2. Unlimited personal liability
3. Responsibility for capital contributions
4. Challenges securing capital investments
5. Higher tax rates

1. Owner liability 

Since sole proprietorship does not distinguish between the owner and the business, the sole owner is responsible for all debts and financial obligations.

This responsibility extends to the actions of employees or contractors—if they create legal or financial burdens for your business, you’ll be responsible for resolving them. A sole proprietorship can expose you to unexpected liabilities if things go wrong.

2. Unlimited personal liability

Unfortunately, your liability as a sole proprietor extends to your personal assets, such as your home, car, or savings. 

Other business structures, like corporations, shield these assets from risks such as lawsuits, but a sole proprietorship has zero liability protection. Consider this possibility, particularly if your business operates in a field with high legal risks.

3. Responsibility for capital contributions

As a sole proprietor, you’ll likely be the only source of capital for funding business costs like office equipment and inventory. Traditional lenders perceive sole proprietorships as risky investments, so securing loans can be challenging. Before spending on your business, ensure you have financial resources to support it.

4. Challenges securing capital investments

Investors generally seek equity in exchange for their backing, but since a sole proprietorship can only have one owner, offering equity isn’t an option. This limitation can hamper your ability to scale your business, particularly in industries requiring substantial capital investments.

It’s also difficult to sell a sole proprietorship. You can’t sell the business as a whole, although you can sell its assets. Also, buyers can only use your business name if you establish a DBA (or “doing business as”) and transfer rights to them. 

5. Higher tax rates

Taxes for sole proprietors differ from those of other business entities, like C corporations. As a sole proprietor, you must pay self-employment tax on top of personal income tax. Determining the amount you owe when combining business and individual taxes can also take time and effort. To avoid paying a larger-than-expected tax bill at the end of the year, the IRS recommends estimating and paying your business taxes quarterly.

In addition to personal income tax, sole proprietors must also pay self-employment taxes, which cover Social Security and Medicare, typically by filing Schedule SE with the federal tax return.

Sole proprietorship vs LLC: Which is right for you?

An LLC is a separate legal entity that protects your personal assets and liabilities. It also lets you choose how to be taxed, like as an S Corp or C Corp, which both have unique tax advantages. 

By default, a single-member LLC is a “disregarded entity” for federal taxes. This means you’ll still file a Schedule C just like a sole proprietor unless you elect S corp or C corp status. What changes on day one is the liability shield and amount of state-level paperwork.

If your business takes on more risk, like larger inventory, wholesale contracts, or a co-founder, an LLC is usually the best choice. 

Here’s a quick look at how to decide whether or not to form an LLC:

In short:

• Stay as a sole proprietor if you’re testing an idea, operate a low-risk service, and want zero extra fees.
• Form an LLC if you handle physical products, share ownership, or want to protect your personal assets. 

Is a sole proprietorship right for your business?

A sole proprietorship is best for small businesses owned and operated by one person, like freelancers, consultants, or other independent contractors. The structure is best suited to low-risk companies with low profits. Often, sole proprietorships start as hobbies or side hustles before becoming full-blown businesses.

Despite the challenges, a sole proprietorship offers easy entry into entrepreneurship. With minimal startup costs, little paperwork, and full business control, it can be an excellent way to validate a business idea or operate a small, personal business. However, understanding and mitigating the risks associated with this type of business structure is vital to avoid unexpected challenges.

International considerations

Selling across borders adds compliance requirements that sole proprietors should consider before committing to this structure:

• Sales tax and VAT (value-added tax): If you ship goods to the European Union, you have to register for each country's VAT or opt into the Import One-Stop Shop (IOSS) system for orders of less than €150. IOSS lets you collect and remit VAT through a single portal. 
• Foreign banking and payments. Tools like Shopify Managed Markets and third-party seller-of-record services can handle VAT, duties, and currency conversion for a fee. If you manage it yourself, expect to open multicurrency accounts and reconcile FX gains and losses on your Schedule C.
• Liability across jurisdictions. Product liability or privacy suits filed abroad may be harder to defend as a sole proprietor. Founders will often form an LLC or incorporate a local subsidiary once they start earning cross-border revenue. 

Growth and transition planning

A sole proprietorship is good for validating a side hustle, but certain business milestones mean it’s time to rethink your structure:

• Net profits consistently between the $60,000 and $100,000 range. At this level, self-employment can eclipse the cost savings of staying solo. Consult with a tax professional to decide if forming an LLC and electing S corp tax status is the next best step. 
• Bringing on a co-founder or equity investor. Sole props cannot add owners. You’d have to dissolve and reform as a multi-member LLC, limited liability partnership, or C corp. 
• Bigger contracts, inventory, and business credit lines. Your personal assets become more exposed with larger purchase orders and credit options. 
• Hiring full-time employees. Payroll compliance and benefit plans become more complex as you grow. Lenders also prefer an EIN-holding entity. 

Overall, converting from a sole proprietorship to LLC is a state-level filing. Your EIN (if you have one), bank accounts, and Shopify store stay intact. You’ll now have the added benefit of liability protection and more favorable tax planning as your business scales.