Sole Proprietorship
BusinessGlossary term
Definition
The simplest business structure in which a single individual owns and operates the business with no legal distinction between the owner and the business entity. While easy and inexpensive to set up, a sole proprietorship offers no personal liability protection, meaning the owner's personal assets are at risk for business debts and lawsuits. All business income is reported on the owner's personal tax return and is subject to self-employment tax.
Related terms
- LLC (Limited Liability Company)A business structure that combines the liability protection of a corporation with the tax flexibility and operational simplicity of a partnership. LLC owners, called members, are generally not personally responsible for the company's debts and liabilities, meaning their personal assets are protected. LLCs can choose how they want to be taxed, either as a sole proprietorship, partnership, S-corp, or C-corp, making them one of the most versatile business structures available.
- PartnershipA business structure in which two or more individuals share ownership, responsibilities, profits, and liabilities of a business. Partnerships come in several forms, including general partnerships where all partners share liability equally, and limited partnerships where some partners have limited liability and a more passive role. Partnership income passes through to the partners' individual tax returns, avoiding corporate-level taxation.
- Self-Employment TaxA tax that self-employed individuals pay to cover Social Security and Medicare contributions, equivalent to both the employer and employee portions of these payroll taxes. As of recent years, the self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare, applied to net self-employment income. Self-employed individuals can deduct half of this tax on their personal income tax return, and choosing to be taxed as an S-corporation can help reduce this obligation.
- DBA (Doing Business As)A legal registration that allows a business to operate under a name different from its official legal name, also known as a trade name or fictitious business name. Filing a DBA is necessary when a sole proprietor wants to use a business name other than their personal name, or when an LLC or corporation wants to operate under an additional brand name. A DBA does not create a separate legal entity or provide liability protection; it simply registers the business's public-facing name.
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