To start a sole proprietorship in the United States, you generally don’t file formation paperwork with the state — you and the business are legally the same person. What you do need to handle is a short list of practical steps: choose a business name and file a DBA if it isn’t your own, get an Employer Identification Number, secure any licenses your work and location require, register for state taxes if you’ll collect sales tax, set up a separate bank account and books, and put insurance in place because your personal assets are on the line. Everything runs through your personal Form 1040 using Schedule C.1Internal Revenue Service. Sole Proprietorships
Pick a Name and File a DBA if You Need One
By default, the legal name of your sole proprietorship is your own name. If you want to operate under anything else, you file a “Doing Business As” (DBA) or fictitious business name statement. Without it, you can’t reliably sign contracts, accept payments, or open a bank account under the brand name.
Before filing, search your county clerk’s records or your state’s business name database to confirm the name isn’t already in use. A DBA on its own doesn’t give you trademark rights, but a conflict will get your filing rejected.
Where you file depends on the state. Some route DBAs through the county clerk; others handle them through the secretary of state. Online filings often clear in a few days, paper filings can take weeks. Fees usually fall between $20 and $50, with a broader range of roughly $10 to $150 depending on jurisdiction and how many names or owners you list.
A handful of states also require you to publish a legal notice in a local newspaper once a week for four consecutive weeks after filing. The paper gives you an affidavit at the end of the run, which you may need to file back with the office that processed the DBA. Confirm your state’s rule before paying for ads.
DBA registrations generally expire after five years and require a fresh filing rather than a renewal. Put the expiration date somewhere you’ll see it. An expired DBA can prevent you from enforcing contracts signed under that name.
Get an Employer Identification Number
An Employer Identification Number (EIN) is a nine-digit tax ID from the IRS. If you have no employees and don’t file excise tax returns, you aren’t legally required to have one — you can use your Social Security Number instead. Most sole proprietors get an EIN anyway. Banks typically want one to open a business account, and using it on invoices and W-9 forms keeps your Social Security Number off documents you hand to clients.
The application is free and takes about ten minutes on the IRS website. The online system is open Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturdays from 6:00 a.m. to 9:00 p.m., and Sundays from 6:00 p.m. to midnight.2Internal Revenue Service. Get an Employer Identification Number It walks you through an interview based on Form SS-4, asking your reason for applying and the name and taxpayer ID of the “responsible party” who controls the business.3Internal Revenue Service. Instructions for Form SS-4
If approved, the IRS issues the number on screen right away. Save or print that confirmation. The official CP 575 notice arrives by mail a few weeks later, and banks and agencies often ask for it.
Check What Licenses and Permits You Need
Licensing depends on what you do and where you do it. There is no single federal business license, so most of it happens at the state, county, or city level. Some occupations — contractors, cosmetologists, accountants, real estate agents — require professional licensing before you can legally offer services. Other businesses just need a general operating permit from the city or county.
Applications usually go through your local licensing department, and many jurisdictions accept them online. Fees run from under $50 to several hundred dollars. Some cities base the fee on projected revenue or employee count rather than charging a flat rate. Straightforward permits can arrive in days; anything requiring inspection or a zoning review can take a month or more.
Operating without a required permit can bring fines, misdemeanor charges, and orders to shut down until you comply. Once licensed, track the expiration date. A lapsed license can also void insurance coverage that assumes you’re properly licensed.
Running the Business From Home
Most residential zones allow home-based businesses, but with conditions. Common ones include limits on how much of the home the business can occupy, no exterior signage, caps on client visits per day, and no on-site employees. Some cities require a separate home occupation permit; others don’t, as long as you stay within the zoning rules. Ask your city’s planning or zoning department before assuming you’re clear.
Understand How You’ll Be Taxed
Your sole proprietorship doesn’t file its own federal return. You report business income and expenses on Schedule C, which attaches to your Form 1040.4Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) The net profit flows into your adjusted gross income and is taxed at your regular rates alongside wages and other income.
On top of income tax, you owe self-employment tax. When you work for an employer, Social Security and Medicare taxes are split with the company. When you work for yourself, you pay both halves, a combined 15.3% on your net self-employment earnings.5Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) That’s 12.4% for Social Security on the first $184,500 of earnings in 2026, and 2.9% for Medicare on all earnings with no cap.6Social Security Administration. Contribution and Benefit Base You calculate this on Schedule SE. You can deduct half of your self-employment tax as an above-the-line adjustment, which lowers your adjusted gross income whether or not you itemize.7Internal Revenue Service. Topic No. 554, Self-Employment Tax
Because no one is withholding, the IRS expects quarterly estimated payments covering both income tax and self-employment tax. For the 2026 tax year, those payments are due:
- First quarter: April 15, 2026
- Second quarter: June 15, 2026
- Third quarter: September 15, 2026
- Fourth quarter: January 15, 2027
Underpay or miss a deadline and the IRS charges interest on the shortfall, currently 7% per year, compounded daily.8Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026 The safe harbor: pay at least 100% of last year’s total tax through your quarterly payments (110% if your prior-year adjusted gross income was over $150,000), or at least 90% of the current year’s liability. First-year sole proprietors with no prior return should estimate conservatively and adjust as the year goes.9Taxpayer Advocate Service. Making Estimated Payments
At the state level, register for a sales tax permit if you sell taxable goods or services. Most states run online portals where you enter your EIN or SSN, business address, and product type, and many issue a temporary permit number instantly. If you sell across state lines, which is routine for online businesses, you may also owe sales tax in other states once you cross an economic nexus threshold — commonly $100,000 in annual sales into that state.
Plan for Personal Liability
The biggest downside of a sole proprietorship is that no legal wall separates business assets from personal ones. If the business is sued or can’t pay its debts, creditors can pursue your savings, home, car, and investment accounts. That is what “unlimited personal liability” means, and it is the single most important thing to understand before choosing this structure.
Insurance is the main way sole proprietors manage this risk. The U.S. Small Business Administration lists several types worth considering:10U.S. Small Business Administration. Get Business Insurance
- General liability insurance covers bodily injury, property damage, and related lawsuits, and is relevant to almost any business.
- Professional liability insurance covers claims of negligence or errors in professional services such as consulting, design, or accounting.
- Commercial property insurance covers damage to business equipment and physical assets from fire, storms, vandalism, and similar events.
- Home-based business insurance is a rider on your homeowner’s policy that covers a limited amount of business equipment and liability. Standard homeowner’s policies typically exclude business claims.
- A business owner’s policy (BOP) bundles general liability and property coverage, often at a lower combined premium.
One slip-and-fall at a client meeting or one defective product can produce a judgment that wipes out years of personal savings, which is why general liability coverage is worth pricing out even as a one-person operation.
Open a Business Bank Account
Mixing personal and business money is legal for a sole proprietor, but it creates a bookkeeping problem that makes tax time harder and weakens your position if the IRS ever questions your deductions. A separate business checking account gives you a clean paper trail.
Banks generally want a government-issued photo ID, your EIN (or Social Security Number if you don’t have one), and your DBA certificate if you’re operating under a name that isn’t your own. Some also ask for a copy of your business license. Bring the EIN confirmation and DBA paperwork with you to avoid a second trip.
Keep the Records the IRS Expects
The IRS doesn’t require a specific system. Accounting software, a spreadsheet, or a paper ledger all work, as long as the records clearly show income and expenses.11Internal Revenue Service. Recordkeeping What matters is being able to substantiate every deduction you claim on Schedule C, which means keeping receipts, bank statements, invoices, and mileage logs.
Keep tax records for at least three years from the date you filed the return. If you underreport income by more than 25%, the IRS has six years to audit. Employment tax records, once you have any, must be kept for at least four years.11Internal Revenue Service. Recordkeeping
If You Hire Someone Later
Bringing on an employee adds obligations that don’t apply to a solo operation. You’ll need an EIN if you didn’t already get one, and you’ll take on payroll tax withholding and matching, federal unemployment tax, Form W-4 and Form I-9 paperwork for each hire, and state-level requirements including workers’ compensation, state unemployment registration, and new-hire reporting.12U.S. Small Business Administration. Hire and Manage Employees Federal unemployment tax (FUTA) is 6.0% on the first $7,000 of each employee’s annual wages, with most employers receiving a credit of up to 5.4% for state unemployment contributions, dropping the effective rate to 0.6%.13Internal Revenue Service. Topic No. 759, Form 940 – Employers Annual Federal Unemployment (FUTA) Tax Return Payroll penalties add up fast, so most sole proprietors who hire even one person use payroll software or a service from day one.