How To Start a Sole Proprietorship in 7 Steps (2026)

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You become a sole proprietor by working for yourself. If you run a business alone and haven’t formed a separate legal entity, a sole proprietorship is your default business structure.

The Small Business Administration’s 2026 report puts sole proprietorships at 86.7% of US businesses without paid employees. As an owner, you’re personally responsible for business debts and legal claims, and you need to arrange your own tax payments.

This guide explains how sole proprietorships work, which filings and licenses apply, and how to start one in seven steps. 

What is a sole proprietorship?

A sole proprietorship is a business owned and operated by one individual, with no legal distinction between the owner and the business. This structure gives you control, but your personal assets, including savings, can be at risk if the small business can’t pay what it owes.

Sole proprietors can sell products or services. A freelance graphic designer, for example, can operate as a sole proprietor from the first client project.

Forming a single-member limited liability company (LLC) creates a separate legal entity and generally limits your personal liability for business debts. However, its default federal tax treatment is usually the same as a sole proprietorship. 

Unless you elect corporate taxation, you continue to report business profit or loss on your personal return and pay self-employment tax on net earnings.

How to start a sole proprietorship in 7 steps

Before registering a name or applying for permits, write your business idea down. Define the customer problem you’ll solve, who will buy, and what you’ll charge. Estimate startup and monthly costs, then outline how you’ll reach customers and fulfill orders.

In a 2025 Shopify survey, only 34% of established store owners said they wrote a business plan before starting. Even a short plan gives you sales targets and a budget to compare against your results after launch.

1. Choose a business name

You can operate under your legal name or use a “doing business as” (DBA) name, also called a trade, assumed, or fictitious name. For example, Jane Smith could run her business as Starlight Copywriting.

You generally need to register a DBA when you operate under a name other than your legal name; policies on where to file and the required forms and fees vary by location. Check with your state business filing office and county or city government to find the correct agency.

Some jurisdictions also have publication and renewal rules. A DBA doesn’t create a separate legal entity or make you anonymous. Registration records identify the owner. Florida, for example, makes that information publicly searchable.

Before committing to a name, check:

• DBA registries: Search the relevant state, county, or city records for existing names.
• Trademarks: Search the USPTO’s trademark database for similar names associated with related products or services.
• Domains: Check whether an address close to your business name is available.
• Social handles: Search the platforms you plan to use for matching usernames.

About 401.6 million domain names were registered across all top-level domains at the end of Q2 2026. Check availability early so you can consider another name if your preferred address is taken. Keep the domain short and easy to spell.

Shopify’s free business name generator can suggest names for your shortlist. Once you’ve checked availability, register your domain through Shopify and manage it alongside your online store.

2. Confirm a sole proprietorship is the right structure

A sole proprietorship lets one owner start testing a business idea without forming a legal entity. 

You can start right away, but you’re personally responsible for business debts and legal claims. Consider an LLC if a lawsuit or unpaid business debt could threaten your savings or home. 

Business profits count toward your personal income taxes. You’ll generally also owe self-employment tax once net earnings reach $400. The calculation normally applies to 92.35% of your business profit after deductible expenses.

The standard self-employment tax rate is 15.3%, divided into:

• Social Security: 12.4%, subject to the 2026 earnings cap of $184,500. Wages from another job count toward that same cap.
• Medicare: 2.9%, with no earnings cap.

An additional 0.9% Medicare tax applies to earnings above the threshold for your filing status. These taxes are separate from federal income tax and any applicable state or local income taxes.

3. Get an EIN if you need one

An employer identification number (EIN) identifies your business for federal tax purposes. Sole proprietors generally need an EIN if they hire employees or have certain employment or excise tax obligations. A bank or payment provider can also ask for one.

If you don’t need an EIN, your Social Security number (SSN) is your taxpayer ID. An individual taxpayer identification number (ITIN) serves that purpose for people who need a US taxpayer ID but aren’t eligible for an SSN.

For US stores, Shopify Payments distinguishes between these business types:

Both options require you to verify your identity and US residential address. An EIN doesn’t replace the owner’s personal verification details.

Apply for an EIN directly through the IRS for free.

4. Get your business licenses and permits

Licensing requirements depend on what you sell, the work you perform, and where you operate. A sole proprietorship must meet the rules that apply to those activities.

Check requirements at each level:

• Federal: Contact the relevant federal agency if you work in a regulated industry, such as firearms sales.
• State: Check professional licensing rules and register for a sales tax permit if your sales trigger collection obligations.
• County and city: Check general business licenses, health permits, fire inspections, and zoning rules. A home-based business may also need a home occupation permit.

Your state and local licensing offices can identify the applications and inspections relevant to your address and activity.

If you hire employees, review the Occupational Safety and Health Administration (OSHA) standards and training obligations. Industry rules may also dictate training requirements for you and your employees. For example, someone preparing meals may need food safety certification. Record renewal dates and complete required training before the relevant work begins.

5. Open a business bank account

A business bank account separates business transactions from personal spending, making expenses easier to track and tax records easier to prepare. Compare monthly fees, transaction limits, mobile deposit features, and integrations with your accounting software.

Banks set their own application requirements. Typical documents and information include:

• Personal identification: A government-issued photo ID, sometimes with a second form of identification
• Tax identification: Your EIN, SSN, or ITIN, depending on the bank’s rules
• Business name documentation: Your DBA certificate or filing receipt, if applicable
• Business details: Your address, business activity, and expected transactions
• Licensing documents: A business license or other local documentation, where applicable

Eligible Shopify stores can also use Shopify Balance, a business financial account for receiving payouts, paying bills, and making purchases. 

Balance has no monthly account fee. It’s a financial account, not a bank account. Availability depends on eligibility requirements, including Shopify Payments activation.

6. Purchase business insurance

As a sole proprietor, you’re not legally separated from your business. A lawsuit or accident can put your personal assets at risk.

Consider these business insurance policies to protect yourself:

• General liability insurance: Helps pay covered claims involving injuries or damage to someone else’s property
• Professional liability insurance: Helps pay covered claims involving mistakes or negligence in your services
• Commercial umbrella insurance: Adds liability coverage above the limits of certain underlying policies

You can also buy general liability as part of a business owner's policy, which adds commercial property and typically business income coverage. Compare the bundle’s coverage and price with separate policies. 

Ask a licensed agent about coverage limits, exclusions, and any workers’ compensation obligations if you hire employees. 

Review contracts as carefully as insurance policies. A lease or loan you sign as a sole proprietor creates personal obligations. Before signing, check liability clauses, insurance conditions, and any personal guarantee.

7. Set up your books and estimated taxes

Keep detailed records of income, expenses, and receipts from your first transaction. 

Reconcile your accounts regularly so bank deposits, payment processing fees, and refunds agree with your records. You can use accounting software to organize transactions, but you still need to review their categories and retain supporting documents.

Sole proprietors generally report business profit or loss on Schedule C and calculate self-employment tax on Schedule SE. Under the IRS’s 2026 estimated tax rules, payments are generally necessary if both of these conditions apply:

• You expect to owe at least $1,000 after subtracting withholding and refundable credits.
• You expect your withholding and refundable credits to fall below the smaller of 90% of your 2026 tax or 100% of your 2025 tax. 

The prior-year percentage rises to 110% if your prior-year adjusted gross income exceeded 150,000(75,000 if your filing status is “married filing separately” this year). The prior-year return must cover all 12 months. 

For a calendar-year taxpayer, the standard payment periods and 2026 due dates are:

Use Form 1040-ES to calculate payments for both income tax and self-employment tax. If your income fluctuates or begins later in the year, a tax professional can help calculate payments using the annualized income method. Check state estimated tax rules separately.

Sole proprietorship requirements

You don’t need to file a federal formation document for a sole proprietorship. You generally report business profit or loss on Schedule C with your personal income tax return. 

File Schedule SE if you owe self-employment tax, and use Form 1040-ES to calculate estimated tax payments when applicable. Hiring employees or conducting certain regulated activities can create additional federal filing obligations.

State-specific requirements

Your business name, activity, and location determine which state and local filings apply. Operating under your legal name can exempt you from DBA registration, but separate licensing, sales tax, and zoning rules still apply.

For sole proprietors using an assumed or fictitious business name, these examples show where to check:

Confirm the filing office, fee, expiration date, and publication rules for your location before submitting an application. DBA exemptions also differ by jurisdiction. 

A registered business name doesn’t replace any business license, professional license, or sales tax permit your activities demand.

Sole proprietorship advantages and disadvantages

A sole proprietorship puts business decisions and obligations in one person’s hands. You can change course quickly, but business debts can reach your personal assets.

Advantages

For an owner who intends to run the business alone, the main benefits of a sole proprietorship are:

• Control: You have the final say over business decisions, from setting prices to deciding when to expand. You can put your plans into action as soon as you’re ready.
• Simple tax returns: You generally report business profit or loss on Schedule C with your personal return. A single-member LLC usually receives the same default federal tax treatment.

Disadvantages

Before borrowing, signing a long-term lease, or planning to pass on the business, consider these drawbacks of a sole proprietorship:

• Personal liability: You’re personally responsible for business debts and legal obligations. An unpaid debt or lawsuit can put your savings and other personal assets at risk.
• Limited financial resources: You can’t sell shares to investors, so growth often depends on savings, business revenue, or borrowing. Shopify Capital provides financing to eligible Shopify store owners based partly on sales performance. Offers to apply appear in your Shopify admin, and funding is subject to approval.
• Limited business continuity: A sole proprietorship isn’t legally separate from its owner. Continuing operations after your death depends on arrangements through your estate or a successor. An estate operating the business needs a new EIN.