A sole proprietorship is the simplest and most common business structure in the United States. It exists automatically when an individual conducts business activity without forming a separate legal entity. There is no filing requirement, no formation cost, and no separation between the owner and the business. You and your sole proprietorship are legally the same entity.
This simplicity is both its greatest advantage and its greatest risk. Because there is no legal separation, you are personally liable for all business debts, lawsuits, and obligations. A customer who slips in your shop, a contract dispute, or an unpaid vendor can potentially access your personal assets, including your home, savings, and personal property.
Sole proprietorship income is reported on Schedule C of your personal Form 1040. Net profit (revenue minus business expenses) is subject to both federal and state income tax at your personal rate, plus 15.3% self-employment tax. You can deduct 50% of the SE tax as an above-the-line adjustment.
Common deductions include business supplies, equipment, vehicle mileage (67 cents per mile for 2025), home office expenses, health insurance premiums, and retirement contributions. These deductions reduce your taxable income, lowering both income tax and self-employment tax.
When your net income exceeds roughly $50,000, consider forming an LLC with S-Corp election to reduce self-employment tax. See the full comparison in our LLC vs Sole Proprietorship Guide.