Sole Proprietorship Setup: Simplest Business Start
Everything you need to start a sole proprietorship, from registering your business name and getting permits to setting up taxes and separating finances.
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Business Identity
Choose a business name or operate under your legal name
If you use any name other than your full legal name, you must file a DBA ('Doing Business As') with your county or state. DBA filings typically cost $10-$50 and must be renewed every 5 years.
Search county records to confirm your desired name is not already taken
File a DBA if using a trade name
Verify the name does not infringe on existing trademarks
Search the USPTO trademark database at tess.uspto.gov for free. A trademark infringement lawsuit can cost $120,000 or more to defend, so 15 minutes of searching now can save you enormous trouble later.
Register a matching domain name
Domain registrations cost $10-$15 per year for .com addresses. Register your name early even if you are not ready to build a website — someone else may claim it.
Legal Requirements
Obtain a general business license from your city or county
Most municipalities require a general business license regardless of business type. Fees range from $25 to $500 depending on your city and projected revenue.
Apply for industry-specific permits
Food, health, construction, and childcare businesses almost always need additional permits. Check with your state's licensing board — processing times can take 2-8 weeks.
Check zoning laws if operating from home
Many residential zones allow home-based businesses but restrict signage, customer visits, and inventory storage. A home occupation permit typically costs $50-$150 and takes 1-2 weeks to process.
Register for a sales tax permit if selling taxable goods
45 states plus D.C. collect sales tax. Registration is free in most states, but failing to collect and remit sales tax can result in penalties of 10-25% of the unpaid amount plus interest.
Financial Setup
Open a separate business checking account
While not legally required for sole proprietors, a separate account makes tax time dramatically easier and looks more professional. Many banks offer free business checking for accounts under 200 transactions per month.
Decide whether to apply for an EIN or use your SSN
You only need an EIN if you plan to hire employees or open certain business bank accounts. Applying is free and instant at IRS.gov. Using an EIN instead of your SSN on invoices adds a layer of identity protection.
Set up a bookkeeping system to track income and expenses
At minimum, use a spreadsheet with columns for date, description, category, amount, and receipt reference. Move to accounting software once you exceed $5,000 per month in revenue — it pays for itself at tax time.
Create expense categories that match IRS Schedule C lines
Save all receipts for purchases over $75
Get a business credit card for expenses
Use the card exclusively for business purchases to build a clear paper trail. Many business cards offer 1.5-2% cash back, which effectively reduces your operating costs.
Tax Obligations
Understand self-employment tax requirements
You owe self-employment tax (15.3% for Social Security and Medicare) on net earnings above $400 per year. This is in addition to federal and state income tax.
Set up quarterly estimated tax payments
If you expect to owe $1,000 or more in taxes, the IRS requires quarterly payments due April 15, June 15, September 15, and January 15. Underpayment penalties are currently around 8% annually.
Calculate estimated tax using IRS Form 1040-ES worksheet
Set calendar reminders for quarterly due dates
Learn which business expenses are deductible
Common deductions include home office ($5 per square foot up to 300 sq ft for the simplified method), vehicle mileage (67 cents per mile in 2024), internet, phone, supplies, and professional development.
Set aside 25-30% of revenue for taxes
Open a separate savings account specifically for tax reserves. Transfer money into it with every payment you receive — this prevents the shock of a large tax bill at filing time.
Insurance and Protection
Get general liability insurance
As a sole proprietor, your personal assets are fully exposed to business debts and lawsuits. General liability coverage starts around $300-$600 per year for low-risk businesses.
Consider professional liability insurance if offering services
Also called errors and omissions (E&O) insurance, this covers claims of negligence or mistakes in your professional work. Costs range from $500-$3,000 per year depending on your industry.
Arrange health insurance for yourself
Self-employed individuals can deduct 100% of health insurance premiums as an above-the-line deduction. Compare marketplace plans during open enrollment (November 1 to January 15) for the best rates.
Evaluate whether to convert to an LLC later
Once your annual net profit exceeds $30,000-$50,000, an LLC provides liability protection worth the $100-$800 annual cost. Many sole proprietors convert within their first 1-2 years of operation.
Frequently Asked Questions
What is the difference between a sole proprietorship and an LLC?
A sole proprietorship has no legal separation between you and the business — your personal assets (home, car, savings) are exposed to business debts and lawsuits. An LLC creates a legal shield that protects personal assets, but costs $50-$500 in state filing fees plus annual maintenance. Sole proprietorships also cannot bring in equity partners without restructuring.
Do sole proprietors pay more taxes than LLCs?
Not inherently. A single-member LLC and a sole proprietorship are taxed identically by the IRS — both pay self-employment tax (15.3%) on net profits plus income tax. The tax difference only appears if the LLC elects S-Corp status, which can reduce self-employment tax when net income exceeds roughly $60,000-$80,000 per year.
Do I need a business license for a sole proprietorship?
In most jurisdictions, yes. City and county business licenses typically cost $25-$100 annually. If you operate under a name other than your legal name, you also need a DBA ("Doing Business As") filing, which runs $10-$100 depending on the state. Some professions (contractors, cosmetologists, food vendors) require additional state-level occupational licenses.
Can a sole proprietor hire employees?
Yes. You will need an EIN from the IRS (free), state employer registration, workers compensation insurance ($0.75-$2.50 per $100 of payroll for low-risk jobs), and payroll tax withholding setup. Many sole proprietors start by hiring independent contractors instead, which avoids payroll obligations but must meet IRS classification rules to avoid misclassification penalties.
How do I pay myself as a sole proprietor?
You simply transfer money from your business bank account to your personal account — there is no formal payroll or salary. The IRS treats all net business profit as your income regardless of whether you withdraw it. You report earnings on Schedule C attached to your personal Form 1040 and pay quarterly estimated taxes (Form 1040-ES) to avoid underpayment penalties.