Sole Proprietorship
A sole proprietorship is the simplest business structure where one person owns and operates a business with no legal distinction between the owner and the business entity.
A sole proprietorship is the default business structure when you start earning income from a business activity without formally registering as another entity type. If you freelance, consult, or sell products without forming an LLC or corporation, you're automatically a sole proprietor.
The biggest advantage is simplicity. There are no formation documents to file with the state (beyond a possible DBA/fictitious name registration), no separate tax returns, and minimal ongoing compliance requirements. You report business income and expenses on Schedule C of your personal Form 1040.
The biggest disadvantage is liability. There is no legal separation between you and your business. If your business is sued or can't pay its debts, creditors can go after your personal assets including your home, savings, and other property.
Sole proprietors also pay self-employment tax (15.3%) on all net business income, which includes both the employer and employee portions of Social Security and Medicare taxes. This is one of the main reasons business owners eventually elect S-Corp status as income grows.
For businesses earning under $50,000 per year, the simplicity of a sole proprietorship often outweighs the tax savings of other structures. As income grows, most business owners benefit from transitioning to an LLC with S-Corp election.
Practical Example
Jennifer starts a freelance writing business. She earns $45,000 in her first year with $10,000 in expenses, leaving $35,000 in net profit. She reports this on Schedule C and pays $4,945 in self-employment tax plus her regular income tax. No separate business tax return is required.