What Is the Difference Between Solopreneurship and Sole Proprietorship?
Forming a business can be a great new venture. A common question that arises when you’re going at it alone, is what’s the best structure to form your business? Should you classify yourself as a solopreneur or a sole proprietorship? There are advantages and disadvantages based on your wants and needs. Will you be looking to hire employees? Are you concerned about protecting your personal assets? There are many factors to consider.
Let’s break down the main difference between solopreneur and sole proprietor so that you have a better understanding of what each means and how you should structure your business.
Solopreneurship and Sole Proprietorship By the Numbers
According to the MBO Partners Report, even in the booming job market and aggressive hunt for talent, people are opting to stick with solopreneurship where they are the only person running their business.
Around 41.8 million adults across ages, skill sets and income groups worked as a solopreneur in 2019.
In the case of sole proprietorship, there are 23 million people who are in this classification — that’s 73 percent of total businesses in the U.S. And 60.1 percent of these small businesses are home-based.
The report shows that people who are working independently as freelancers, contractors or solopreneurs are contributing around 6.2 percent of the U.S. GDP, or $1.3 billion to the U.S. economy.
And running your own business isn’t just for early in your career — it can be a solid option to take you through to the end of your career. Solopreneurs seem to be more comfortable with their retirement plans. Out of the people surveyed in 2019, only 28 percent said that retirement planning is a challenge for them, which is down from 42 percent back in 2016.
What Is a Solopreneur?
Solopreneur is the blend of two words, solo and entrepreneur, which means an entrepreneur who works alone. They prefer to not rely on anyone and strive to monetize their own business.
A solopreneur may, at certain times, need to delegate specific tasks. This is usually temporary and may be done by outsourcing. In essence, they work with people on a specific job but do not hire them as an employee.
It’s not uncommon for entrepreneurs to start their business as a solopreneur and then build out a team as needed and as the business grows.
When setting up a business, the most common business structures for a solopreneur are starting an LLC or operating a sole proprietorship.
What Is a Sole Proprietor?
The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.” If you don’t choose to incorporate as a legal business structure, the IRS will designate you as a sole proprietor by default when it comes to tax time. While a sole proprietorship doesn’t cost any money to start, there is no legal separation between its owner and the business itself (more on that below).
As opposed to a solopreneur, who most often works alone (solo), a sole proprietor may hire freelancers or employees to delegate responsibility to or bring on people that have a skill set that the sole proprietor does not possess to help grow the business.
Differences Between Solopreneur and Sole Proprietor
Legal Business Structure
Both a solopreneur and a sole proprietor can be considered an unincorporated business. In both situations, you do not need to file any paperwork with your state. As a sole proprietor, YOU are the business and all debts/liabilities fall on the individual. You are the only owner and member of the business. Should you want to bring someone else into the business as an owner, you would need to consider forming another structure, such as an LLC or corporation.
A solopreneur is not a business structure. A solo worker can operate as a sole proprietorship, but can also form a legal business entity, such as an LLC.
Business income for both a solopreneur and a sole proprietor passes through to their personal taxes. Each files a Schedule C and attaches it to their personal taxes. And each needs to pay any estimated taxes and self-employment taxes.
However, if you’re a solopreneur who decides to form your business as an LLC and not a sole proprietorship, you can potentially reduce your self-employment taxes by electing to be treated as an S Corp at tax time. A solopreneur operating with an LLC may also find it easier to locate common business deductions due to the required separation of personal finances and business finances.
Management of Employees
If you’re a true solopreneur this is quite simple…you don’t have any employees. It’s just you.
However, running a business as a sole proprietor allows you the ability to hire employees and even independent contractors to help you run your business activities. At the end of the year, if you are using independent contractors, you need to issue them a 1099 for tax purposes. If you go the route of hiring employees, you are responsible for handling the employees’ taxes on their paycheck and issuing a paycheck to compensate them for their time and work.
As a sole proprietor with employees, it would be wise to also consider workers’ compensation insurance should an employee get injured on the job.
Finances and Banking
It is recommended that you separate your finances with a sole proprietorship or as a solopreneur. Using one bank account that funnels personal and business money in and out can get confusing and cost you valuable time down the road if a debit or credit is in question. Separating your finances with a dedicated business bank account and credit card will help you better manage your business and finances as a whole. If you are a solopreneur who forms an LLC, it will be a requirement to separate your personal and business finances.
If you operate as a sole proprietor, you may face more difficulty getting a business credit card or loan. Without legally incorporating in your state and separating your finances, many banks and lenders will view your business as less legitimate and a riskier investment. Setting up an LLC will make this much easier.
While a sole proprietorship may be the easiest business to form, it provides you with no protection and your personal assets are essentially on the line should your company end up being sued for any reason.
As a solopreneur with an LLC business structure, you are provided clear separation between your business and you, personally. For many, this can provide peace of mind knowing that assets, such as your home, will not be affected should a lawsuit be filed against your business.
Licenses and Permits
Depending on the type of business you are conducting, you may need proper licenses and permits. Regardless of whether you are a solopreneur set up as an LLC or a sole proprietorship, you still need to go through the process of applying for and obtaining any licenses and permits required by your state and locality.
An EIN is an Employee Identification Number. It’s similar to a Social Security number for your business. A solopreneur with an LLC should apply for an EIN to keep their Social Security number off of important documents and contracts.
While a sole proprietor does not necessarily need an EIN, you can apply for one to protect your Social Security number from clients and vendors should they need your information for tax purposes. If you hire employees as a sole proprietor or a solopreneur LLC, you need to obtain an EIN.
Having an EIN is also helpful in both instances if you want to set up a dedicated business bank account or apply for a business credit card.
Business insurance is a good idea no matter what business structure you set up. It is especially important for a sole proprietorship since you have zero protection from any sort of legal claims against you.
As a solopreneur with an LLC, even though your business structure defines a clear line between business and personal assets, having business liability insurance can still be of great importance to help protect you and the business.
Which Is Right for You?
Operating as a sole proprietor or solopreneur without the protection of a legal business structure may be okay if you are operating a small side business and want to avoid the paperwork and compliance that comes along with setting yourself up as a solo LLC. However, you are risking your personal finances if you are ever faced with a lawsuit or run into financial difficulties with your business.
Choosing to operate as a solopreneur with an LLC business structure in place will give you legal protection and more legitimacy and credibility in the eyes of your clients. An LLC also gives you more tax options, such as electing to be taxed as an S Corp, potentially reducing your self-employment taxes. And don’t worry — even if you consider yourself a solopreneur, you can easily expand your LLC to include employees or other business partners down the line.
If you need further help determining what business type you should choose, check out our Business Entity Quiz. This interactive quiz will ask you a series of questions to suggest the type of legal entity that could work for your new business venture.