Sole Proprietorship
Quick definition
The simplest business structure. One person, no separate legal entity, income flows to the owner's personal tax return.
A sole proprietorship is the default business structure for any individual doing business in their own name without forming a separate entity. Most independent contractors, freelancers, and gig workers are sole proprietors whether they realize it or not.
Tax treatment
Sole proprietors file Schedule C with their personal Form 1040. Business income and expenses flow directly into personal taxable income. The mileage deduction reduces both regular income tax and self-employment tax.
Versus LLC or S-corp
A single-member LLC is taxed identically to a sole proprietorship by default (also files Schedule C) but provides legal liability protection. An S-corp is a different tax treatment that may save self-employment tax on income above a "reasonable salary" threshold but adds complexity.
When to consider upgrading
Once self-employment income reliably exceeds about $50,000 per year, the tax savings of an S-corp election may justify the additional complexity. Below that, sole proprietor (or single-member LLC) is usually the right structure.
Related terms
Independent Contractor
A worker classified as self-employed for tax purposes. Receives 1099 income instead of W-2 wages.
Schedule C
The federal form self-employed workers use to report business income and expenses, including the mileage deduction.
Self-Employment Tax
The 15.3% tax on net self-employment income that funds Social Security and Medicare.
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