You May Already Be One
I get a lot of questions from people about scaling, hiring, even selling their business. A lot of these questions come from people who don’t even have a working website yet.
They wring their hands on certain, seemingly key, subjects. They Google like crazy. They practically pull out the Magic 8 Ball for an answer - hoping to line up every possible duck before starting.
One of the most popular early worries is, “Should I be an LLC (Limited Liability Company) or a sole proprietorship?”
My response is usually - just start your business already.
I know it sounds like glib advice but the thing is, once they start their business, they’re going to become a sole proprietor…almost accidentally.
(Seriously. It doesn’t take much to become one.)
If you’re “the only owner and are operating under your legal name (not under a DBA name),” you are - according to the IRS and the U.S. Chamber of Commerce - a sole proprietor. It’s as simple as that.
The fact is the process is so fuss-free - that it barely registers for most solopreneurs. A lot of people don’t even know that’s what they are.
What’s a Sole Proprietor?
A sole proprietorship is a business entity that’s got one owner and isn’t incorporated. It sort of shares the same identity - legally and financially - with the owner. There’s no legal distinction between you and your business.
Most people who do consulting, coaching, training, or people who sell support services (like virtual assistants and online business managers) fit the bill. Basically, anyone who can put the word “freelance” in front of their title - like “Freelance Tax Consultant” - can easily be a sole proprietor.
Some quick examples of these:
Home Healthcare Worker
If it can be a side hustle or a one-person gig - it’s a potential sole proprietorship.
So this is the status that a lot of people fall backward into. But is that a good thing?
In this blog, I want to run down the advantages and disadvantages of being a sole proprietor. We’ll talk briefly about - ugh - taxes. Then talk a bit more about why this question causes some people anxiety.
Whether you’re in the club by decision or default, I want you to know where you are on the map. At least for the time being. And I want you to get on with your life.
The Advantages and Disadvantages of Your Solo Status
A really attractive element of starting a service-based business is there’s no storefront, no supply chain headaches, sooo little overhead. The bar to entry is perfectly sane.
It’s the same with being a sole proprietor.
“The sole proprietorship is a popular business form due to its simplicity, ease of setup, and nominal cost.” says Entrepreneur.com, “A sole proprietor need only register his or her name and secure local licenses, and the sole proprietor is ready for business.”
With this structure, the business entity is basically You.
All the profits and losses go to you - into and out of your account. You are all the employees. You are the board of directors. You are all the stakeholders.
For most consultants, coaches, writers, and the like this is the most intuitive place to begin.
There’s less red tape, simple banking, and no group decisions. And the status elevates you from side hustle to small business.
Weirdly, the advantages and disadvantages stem from the same feature.
Because the business is You - you have zero separation of liability. All debt, leases, lawsuits, everything stops at your door. That includes any temporary employee acting on behalf of your company.
If you need a loan, it’s harder for you to build credit as a business. So, getting cash from a conventional lender is tough.
You’d have to secure a loan based on your own credit history. And if it goes into default, you take the direct hit. You can’t neatly divide your personal assets from the business.
Also, selling is harder. By definition, the business is attached to a specific owner. If you stop working it, it ceases to exist.
You could definitely still sell the business - but only as a collection of assets; then you can transfer the name by creating a DBA.
Not the end of the world. And once you jump through a few hoops, it’s done - but it’s not exactly a straightforward transaction.
What About the Money?
Well, the good news is you wouldn’t need a separate business account. All profits go into the same bucket - that bucket being your personal account. It’s simply counted as your income.
A sole proprietorship is what’s known as a pass-through entity (sometimes called a “flow-through entity”). This is when all the income to a business flows through to the owner personally. Tax-wise it ends up looking just like a salary.
“With flow-through entities,” says Investopedia, “the income is taxed only at the owner's individual tax rate for ordinary income: The business itself pays no corporate tax.”
So to break that down, you have to pay Federal income tax and state income tax - if you have that in your state. There’s also the dreaded self-employment tax (that’s your contribution to Social Security and Medicare). But you won’t have to pay any corporate extras.
So Why Are We Talking About This?
Here’s the thing. I lured you into this conversation with a promise of figuring out your business status. And, look, I do want you to have the information you need.
But I think the question might be a bit of a red herring.
A lot of the Googling, hand wringing, and advice-seeking on the subject - it just doesn’t seem to be about the business at all.
I think a lot of the time it’s just a desire to put off starting.
I’m not going to lie - I like this option mainly because it’s easy. Because it’s a status that encourages you to get started and move on.
If this is a struggle for you. If you’re making lists of every possible worst-case scenario. If you’re weighing the pros and cons - not once - but dozens of times? This isn’t about your business status.
It’s about fear.
I have a secret for you - I’m not a sole proprietor. I’m an LLC. And maybe that ends up being the right thing for you. Someday.
But right now, motion is what matters. Just. Get. Started. Don’t use your business status as an excuse to put off trying, working, and living.
When you’re starting out in a service business, the risk is low. The capital in question is manageable. This doesn’t have to be a big deal yet.
I subtitled this blog, “Everything You Need to Know.”
Because…there’s not much you actually need to know here. Not now.
What you need to DO - is move.
Okay then! Are you READY to start, for real? We talk all about FINDING clients in my free coaching hour, Brave Biz Lab. Sign up here.