A self-employed individual works for him or herself. A sole proprietor owns a business by themselves.
Sole Proprietorship Defined
A sole proprietorship is an unincorporated business form owned and operated by one person. Sole proprietors are personally accountable for debts and legal responsibilities. Sole proprietors pay taxes on revenue and submit an IRS Form 1040 Schedule C.
Insurance and Liabilities
Sole proprietors likely need business insurance for liability protection, to qualify for contracts, or meet licensing. General liability insurance covers risks like customer injury and property damage.
Taxes and Self-Employment
Sole proprietors pay more taxes than employees. They pay both portions of Medicare and Social Security via self-employment tax.
Registering a Business
An LLC is a separate legal entity from its owners. While a self-employed individual and a sole proprietorship involve working for themselves, the main difference is a sole proprietorship is a formal business structure. Sole proprietors must register with their state and obtain licenses and permits.
Frequently Asked Questions
How do I know if I am a sole proprietor?
A sole proprietor owns a business alone and earns income by giving services or goods to clients or companies. They are responsible for taxes on profits and must submit an IRS Form 1040 Schedule C.
What is the difference between a sole trader and a self-employed person?
Sole proprietors and self-employed individuals often refer to the same employment situation, where individuals run their own business. However, self-employment can include independent contractors and partners, not just sole proprietors.