An example of sole proprietorship
To better understand the ins and outs of sole proprietorship, let’s pretend for a moment you sell hand-made, free-range, organic leather shoes. (Hey, it could be a real thing.) You have a pretty niche market, so you take the first logical step and sell your shoes locally as a hobby.
Soon, word of your fancy shoes has traveled through town. You’re feeling confident about the leap to full-time self-employment, so you leave your job and focus on your shoes. You have a business name, pay self-employment taxes, and have turned your shoes into your entire source of personal income.
Your shoe trade has turned into the type of business known as a sole proprietorship, making you the sole proprietor. While you have a business name, you’re conducting business as yourself and are responsible for the entirety of the business. This makes you different from a limited liability corporation, or LLC, as you have full legal responsibility for the company.
You might be wondering if a sole proprietor is the same thing as an independent contractor. Well, yes and no. Both are individuals representing themselves, but a sole proprietor pays their taxes via Schedule C, while an independent contractor files their taxes using a 1099-MISC.
You can be a sole proprietor and work as an independent contractor, or you can be a sole proprietor and treat yourself as an employee by using a Schedule C.