By Jake Lawson, LLC Formation Strategist
Let me cut straight to the chase: Yes, starting a sole proprietorship is ridiculously easy—you literally just start doing business and poof, you’re a sole proprietor. But after 15 years helping over 1,200 entrepreneurs navigate business formation, I’m going to tell you something most guides won’t upfront: sole proprietorships are financial time bombs.
Here’s the brutal reality: while you’re saving maybe $100-$200 on LLC filing fees, you’re risking your house, car, savings, and retirement fund every single day your business operates. It’s like driving cross-country without insurance to save a few hundred bucks—technically cheaper until disaster strikes.
And in today’s lawsuit-happy business environment, disaster is more likely than most people think.
What Is a Sole Proprietorship? (The Unfiltered Reality)
A sole proprietorship is the simplest business structure possible. It’s so simple that there’s literally no paperwork to start one. The moment you start doing business activities with the intent to make money, congratulations—you’re officially a sole proprietor.
But here’s what that really means: you and your business are legally the same entity. Every business debt, every lawsuit, every liability—it all comes back to you personally. There’s no legal separation, no protection, no barrier between your business problems and your personal assets.
Think about it this way: if your consulting business gets sued for $100,000 and loses, creditors can take your personal house to satisfy that judgment. Your business insurance claim gets denied? Your personal bank accounts are fair game.
The Sole Proprietorship “Advantages” (And Why They’re Not Actually Advantages)
Let me address the two things people always mention as sole proprietorship benefits:
“Advantage” 1: Easy Setup
Reality check: Yes, it’s easy to start, but so is falling off a bridge. Easy doesn’t automatically equal smart.
Sure, there’s no paperwork to file initially. But you’ll likely end up filing paperwork anyway—for a DBA name, business licenses, tax registrations, bank accounts. So the “no paperwork” advantage disappears pretty quickly for most real businesses.
“Advantage” 2: Simple Taxation
Reality check: This isn’t actually an advantage over LLCs.
People love to talk about sole proprietorship tax simplicity, but here’s what they don’t tell you: single-member LLCs are taxed exactly the same way. You still file Schedule C with your personal tax return. The tax “advantage” of sole proprietorships is completely eliminated by choosing an LLC.
So what are you really getting with a sole proprietorship? Easy setup for a business structure that offers zero protection and no real benefits. Not exactly a compelling value proposition.
The Sole Proprietorship Disadvantages (The Real Story Everyone Should Tell You Upfront)
Now let’s talk about the problems that actually matter:
Disadvantage 1: Zero Liability Protection
This is the deal-breaker, and it’s why I rarely recommend sole proprietorships to anyone.
If your business gets sued—and businesses get sued for all sorts of reasons you can’t predict—your personal assets are completely exposed. Your house, your car, your personal bank accounts, your retirement savings. All of it can be used to satisfy business debts and legal judgments.
Let me paint you a picture: You’re running a freelance marketing business as a sole proprietor. A client claims your campaign cost them $75,000 in lost revenue. They sue and win. Guess what? They can come after your personal home to collect that money.
With an LLC? Your personal assets are protected. Only business assets are at risk.
Disadvantage 2: Credibility Issues
Here’s something most guides bury: sole proprietorships often look less professional to potential clients, partners, vendors, and banks.
When you’re trying to land that big corporate contract, “John Smith Consulting” sounds a lot less established than “Smith Consulting LLC.” Fair or not, perception matters in business, and sole proprietorships often get perceived as “hobby businesses” rather than serious enterprises.
Disadvantage 3: The Conversion Nightmare
This is where a lot of people get burned. They start as a sole proprietorship thinking they’ll “upgrade later” when the business grows.
Converting from a sole proprietorship to an LLC isn’t a simple one-step process. You need to:
- File LLC formation documents with your state
- Get a new EIN from the IRS
- Update your business bank accounts
- Reapply for business licenses under the new entity
- Update contracts with clients and vendors
- Redo your business insurance
- Update your website and marketing materials
It’s a bureaucratic nightmare that can take weeks and cost hundreds of dollars in fees and lost time. Much easier to start right the first time.
Disadvantage 4: Banking and Business Relationship Complications
Many banks prefer working with formal business entities rather than sole proprietorships. You might face:
- Higher fees for business banking
- More paperwork and personal guarantees
- Difficulty getting business credit cards
- Complications with merchant processing accounts
Disadvantage 5: Scalability Problems
If your business grows and you want to bring in partners, investors, or sell the business, sole proprietorships create major complications. You can’t sell ownership in a sole proprietorship—you can only sell the business assets.
Single-Member LLC vs. Sole Proprietorship: The Real Comparison
Let me break this down with actual facts:
| Factor | Sole Proprietorship | Single-Member LLC |
| Filing Requirements | None | Articles of Organization |
| Typical Filing Fee | $0 | $50-$500 (most states $100-200) |
| Annual Fees | Usually $0 | $0-$300 (varies by state) |
| Liability Protection | None | Complete personal asset protection |
| Tax Treatment | Schedule C with personal return | Schedule C with personal return (identical) |
| Credibility | Lower | Higher |
| Business Banking | More complicated | Straightforward |
| Scalability | Poor | Excellent |
| Conversion Costs | High (if you upgrade later) | N/A |
Look at those numbers. You’re saving maybe $100-$300 upfront and $0-$300 annually in exchange for zero liability protection. That’s terrible risk management.
When a Sole Proprietorship Might Make Sense (The Very Short List)
After 15 years in this business, I can think of exactly three scenarios where I might recommend a sole proprietorship:
Scenario 1: You’re Truly Broke
If you literally cannot scrape together $100-$200 for LLC filing fees and you need to start generating income immediately, a sole proprietorship might be your only option. But the moment you can afford it, convert to an LLC.
Scenario 2: You’re Testing a Very Low-Risk Business Idea
If you’re selling crafts at farmers markets or doing very low-liability consulting for friends, the risk might be manageable temporarily. But even then, I’d probably still recommend an LLC for the credibility boost.
Scenario 3: You Live in a Very Expensive LLC State
A few states (like Massachusetts) have high LLC fees that might make sole proprietorships temporarily attractive for cash-strapped entrepreneurs. But you should still plan to convert as soon as financially feasible.
That’s it. Three scenarios, all with major caveats. For everyone else, an LLC is almost always the better choice.
How to Start a Sole Proprietorship (If You Insist on Ignoring My Advice)
Look, I’ve made my feelings clear about sole proprietorships. But if you’re determined to go this route, here’s how to do it as safely as possible:
Step 1: Start Doing Business
Congratulations! The moment you start business activities with profit intent, you’re a sole proprietor. No paperwork required. It’s that simple (and that risky).
Step 2: Choose Your Business Name Strategy
You have two options:
Option A: Use Your Legal Name Do business as “John Smith” or “Jane Doe.” Simple, but terrible for branding.
Option B: File a DBA (Doing Business As) Want to do business as “Smith Consulting” or “Doe Marketing”? You’ll need to file a DBA registration with your state or county.
Cost varies by state: $10-$100 typically, renewable every few years.
Step 3: Get an EIN (Highly Recommended)
While not technically required, get an Employer Identification Number from the IRS. It’s free and keeps you from having to use your Social Security Number on business documents.
Apply at irs.gov. Takes about 10 minutes online.
Step 4: Research License Requirements
Check with your state and local governments for required business licenses. These vary dramatically by business type and location.
Step 5: Get Business Insurance (Critical for Sole Proprietors)
Since you have zero legal protection, insurance becomes absolutely critical. Consider:
- General liability insurance
- Professional liability insurance
- Errors and omissions coverage
- Business property insurance
This insurance will often cost more than the LLC filing fee you’re trying to avoid.
Step 6: Open a Business Bank Account
Keep business and personal finances completely separate. Some banks require a DBA to open business accounts for sole proprietors, so call ahead.
Step 7: Set Up Accounting and Record Keeping
Track income, expenses, and keep copies of all business documents. You’ll need this for taxes and potential legal issues.
Step 8: Understand Your Tax Obligations
File Schedule C with your personal tax return. Consider quarterly estimated tax payments if you’ll owe more than $1,000 annually.
The LLC Alternative (What I Actually Recommend)
Instead of a sole proprietorship, here’s what I typically recommend for solo entrepreneurs:
Form a single-member LLC.
Why? The benefits are overwhelming:
- Same tax treatment as sole proprietorship (Schedule C filing)
- Complete personal asset protection
- Professional credibility with clients and vendors
- Easier business banking
- No conversion headaches later
- Scalability for growth and partnerships
- Usually only $100-200 to start
The cost difference is minimal, but the protection difference is massive.
Common Sole Proprietorship Mistakes That Cost Money
After seeing hundreds of business formations, here are the mistakes that consistently cause problems:
Mistake 1: Assuming “Simple” Means “Better”
Simple isn’t always better. A bicycle is simpler than a car, but you wouldn’t use it for a cross-country business trip.
Mistake 2: Ignoring Liability Risks
“It won’t happen to me” is not a business strategy. Every business faces potential liability, often from sources you can’t predict.
Mistake 3: Putting Off the LLC Conversion
The longer you wait to convert, the more complicated and expensive it becomes. Start right the first time.
Mistake 4: Not Getting an EIN
Using your SSN for business purposes increases identity theft risk and looks unprofessional to clients and vendors.
Mistake 5: Poor Record Keeping
Without good records, you can’t track profitability, handle tax audits, or prove business expenses.
Mistake 6: Mixing Personal and Business Finances
This creates tax problems and eliminates what little protection sole proprietorships might offer in extreme circumstances.
The Tax Reality: Sole Proprietorship vs. LLC
Let me clear up the biggest misconception about sole proprietorships:
The tax treatment is identical between sole proprietorships and single-member LLCs.
Both use Schedule C filing with your personal tax return. Both pay the same self-employment taxes. Both qualify for the same business deductions.
The “tax simplicity” argument for sole proprietorships is completely irrelevant when comparing to LLCs. You get the same tax treatment with dramatically better legal protection.
Industry-Specific Considerations
Some industries make sole proprietorships particularly risky:
High-Liability Industries
- Healthcare and wellness services
- Construction and contracting
- Professional services (consulting, accounting, legal)
- Food service and catering
- Fitness and personal training
- Real estate services
Technology and Online Businesses
Even “low-risk” online businesses face liability from:
- Copyright and trademark disputes
- Data breaches and privacy violations
- Customer service disputes
- Platform policy violations
Service-Based Businesses
Consulting, coaching, and professional services create enormous liability exposure through:
- Professional negligence claims
- Errors and omissions
- Client dissatisfaction lawsuits
- Breach of contract disputes
When to Consider Other Business Structures
While I usually recommend LLCs over sole proprietorships, sometimes other structures make sense:
Corporation
If you plan to raise investment capital, go public, or want certain tax elections, a corporation might be better long-term.
Partnership
If you have business partners, you’ll need either a partnership (risky) or multi-member LLC (recommended).
Specialized LLCs
Some states offer specialized LLC structures for specific industries or purposes.
But for most solo entrepreneurs? Single-member LLC is the optimal choice.
My Bottom-Line Recommendation
After 15 years helping over 1,200 entrepreneurs, here’s my honest advice:
Skip the sole proprietorship. Form an LLC.
The filing fee is a bargain for personal asset protection. Most states charge $100-200, which is less than most people spend on coffee in a few months. The peace of mind is priceless.
Yes, sole proprietorships are easier to start. But easy isn’t the goal—building a successful, protected business is the goal.
If you absolutely cannot afford the LLC fees right now, start as a sole proprietorship but convert to an LLC the moment you can afford it. Don’t let cost savings turn into a financial disaster.
Ready to Make the Smart Choice?
Look, I know I’ve been pretty hard on sole proprietorships in this guide. But that’s because I’ve seen too many entrepreneurs make the “easy” choice upfront and regret it later.
Your business deserves better than the bare minimum. You deserve better than zero protection.
If you’re ready to form an LLC (the choice I actually recommend), check out our state-specific LLC formation guides for step-by-step instructions tailored to your location.
If you want professional help with the formation process, services like Northwest Registered Agent can handle the paperwork for a reasonable fee.
But whatever you do, don’t let the allure of “easy” trick you into choosing inadequate protection for your business and personal assets.
Questions about your specific situation? After 15 years of helping entrepreneurs navigate these decisions, I’ve seen most scenarios. Feel free to reach out—I’m always happy to provide straight advice without sales pressure.
Remember: the goal isn’t to start a business as cheaply as possible. The goal is to start a business that protects your future while setting you up for sustainable success.
Jake Lawson is an LLC Formation Strategist with over 15 years of experience helping entrepreneurs make smart business structure decisions. He’s guided more than 1,200 businesses through formation processes and believes in choosing protection over convenience every time. His insights have been featured in StartupNation, Global Entrepreneurs Network, and FinTech Weekly.