Starting Small: The Benefits and Risks of Sole Proprietorships

By Neal McTighe, Director of SBTDC’s Business Launch Program

As director of the SBTDC’s Business Launch Program, I see firsthand how my team helps hundreds of North Carolinians start their businesses every year. One common question I hear is about choosing the right business structure. Today, I want to focus on sole proprietorships, one of the simplest and fastest ways to get started in business.

What a Sole Proprietorship Is

A sole proprietorship is the simplest form of business ownership. It means that you and your business are legally the same entity. There is no formal registration with the state, no separate tax return for the business, and no distinction between personal and business income.

If you go out and provide a service (such as home cleaning) and accept payments under your own legal name that you deposit into your personal bank account, you are already operating as a business. You are a sole proprietor, even if you have never filed any paperwork.

If you later want to operate under a different trade name, such as “Triangle Home Cleaning,” you must file a Doing Business As (DBA) registration with your county Register of Deeds. This simple filing, which usually costs about $25, allows you to conduct business legally under that name while remaining a sole proprietor.

Why Many Entrepreneurs Start Here

The main advantages of a sole proprietorship are ease and affordability. You can get to market quickly with minimal paperwork and no state filing fees. Taxes are simple too, since profits and losses go on your personal tax return using IRS Schedule C.

This structure can be a good way to test a business idea or even run a small operation for the long term, as long as the work does not expose you to significant financial or legal risk. That is where it becomes tricky, because most businesses carry at least some level of risk. For instance, a home cleaning service, a food business, or any work that involves regular customer interaction can create situations where liability becomes real. When that happens, forming an LLC or corporation becomes the safer and more strategic choice.

Understanding the Risks

As a sole proprietor, you are personally responsible for any debts or legal issues your business faces. Your personal assets could be at risk if something goes wrong. For businesses that naturally carry more liability, such as those selling food, performing physical work, or entering customers’ homes, forming a limited liability company (LLC) or corporation provides stronger protection and peace of mind.

When It’s Time to Transition

Growth often signals when a business should formalize. If you are hiring employees, signing larger contracts, or taking on more financial exposure, it may be time to form an LLC or corporation. These structures limit your personal liability and offer more flexibility in bringing in partners or investors. They can also boost your business’s credibility.

I have worked with many founders who began as sole proprietors and later transitioned. One client started offering web design services alone, then after landing larger projects with ongoing contracts, formed an LLC to better manage liability and payroll. That step gave her the foundation to expand confidently.

Why Transitioning Can Be More Complex Than It Seems

I once advised a business that had operated as a sole proprietorship for about a year before deciding to form an LLC. The owner had built steady client relationships, opened accounts with several vendors, and even brought on a part-time assistant. When it came time to make the switch, she expected a simple form and a quick approval. Then came the headache.

Because an LLC is legally a new entity, she had to apply for a new Employer Identification Number (EIN) from the IRS, which functions as the company’s federal tax ID. That meant opening a new business bank account under the LLC name, updating all tax documents, and executing new contracts with existing clients and vendors. Even software subscriptions and payment processors needed to be reconnected under the new entity.

Her experience showed how detailed and sometimes disruptive this process can be. My advice to her, and to anyone considering a similar move, is to evaluate risk early, to form an LLC when liability exposure begins to increase, and to grow from there. Planning ahead helps you avoid the scrambling that often comes when a successful business outgrows its original structure.

How the SBTDC Can Help

Regardless of where you are in your journey, the fundamentals remain the same: keep good records, separate business finances, maintain insurance, and plan for taxes. The SBTDC’s Business Launch Program offers training and one-on-one counseling to help you decide which structure fits your goals and guide you through each step when you are ready to transition.

If you are preparing to start or grow your business in North Carolina, our team would be happy to help you build it the right way from the beginning.