How to Start a Sole Proprietorship and When to Upgrade to an S Corp

Starting a sole proprietorship is simpler than most solopreneurs think because you become one automatically the moment you earn income. The real strategy is launching quickly with the basics like a business name, EIN, and dedicated bank account, then upgrading when the math makes sense. Lettuce automates your entire foundation from EIN creation to bookkeeping, so you can focus on growing your business instead of managing paperwork.

Most solopreneurs overthink their business launch when the simplest path is already available. Starting a business as a sole proprietor requires no paperwork; you become one automatically the moment you earn money from your skills.

The strategic move is to launch quickly and upgrade when the math makes sense. Once your annual business income consistently reaches $80,000, the tax savings from an S Corp election typically outweigh the added complexity, often delivering $8,000+ in annual savings.

Lettuce makes this entire path easier from day one. Get started today to build a clean financial foundation and unlock automated tax optimization the moment you're ready to upgrade.

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What You Need to Start a Sole Proprietorship in 2025

Before you begin taking on clients, every sole proprietor needs a few foundational pieces in place. These aren’t complex steps or formal registrations; they’re the basic requirements that establish your business identity, support clean bookkeeping, and ensure you can operate legally in your state. The requirements focus on securing your business name, tax ID, state or local licenses, and banking setup.

Here's a list of what you need:

• A business name that’s available through trademark and local registry searches

• A DBA filing if you want to operate under a name other than your personal legal name

• Any required local or state licenses based on your industry and location

• An EIN from the IRS for business banking and tax privacy

• A dedicated business checking account to keep your finances separate and organized

These foundational requirements take only a few hours to complete and give your business a clear, professional structure from day one.

Step-by-Step: How to Start Your Sole Proprietorship Today

Ready to make your business official? These are the core steps every sole proprietor completes to establish a clean legal and financial foundation. These steps to start a sole proprietorship in 2025 follow the typical order most solopreneurs use when setting up for the first time.

1. Choose Your Business Name and File a DBA (If Needed)

Select a business name and verify its availability through your state’s business registry or trademark databases. If you plan to operate under a name different from your legal name, file a DBA with your state or county. Online filings are common and low-cost, and approval gives you the legal right to use that name on business documents.

2. Apply for Your Federal EIN

Visit the IRS website to apply for your free Employer Identification Number. The EIN is issued immediately upon approval and protects your Social Security number on business forms. You’ll also need it to open a business bank account.

3. Open Your Business Checking Account

Use your EIN and business name to open a business checking account. A dedicated account keeps your finances organized and supports future entity benefits if you upgrade to an LLC or elect S Corp status. Look for accounts with low fees and strong digital banking features.

4. Identify Any Required Licenses or Permits

Check what licenses and permits apply to your specific type of work and location. Local governments often require general business licenses, while states regulate specialized fields like construction, cosmetology, or food service. Federal licenses apply only to certain industries.

5. Set Up Your Bookkeeping System

Create a bookkeeping process that tracks income, expenses, and deductions from the start. Automated bookkeeping tools help you categorize transactions correctly and avoid leaving deductions on the table. Connecting your business bank account streamlines the process as you grow.

Or skip these steps

If you’d rather avoid the setup process, Lettuce handles every part of your sole proprietor foundation for you: from EIN creation and business banking setup guidance to automated bookkeeping that organizes your finances from day one. Get started today and let Lettuce simplify your launch so you can focus on serving clients instead of managing paperwork.

How Sole Proprietor Taxes Work (And How to Pay Less)

Understanding how taxes work for sole proprietorships is straightforward once you know the basics. You report your business profit on Schedule C with your personal Form 1040. That profit faces two types of taxes: regular income tax plus 15.3% self-employment tax covering Social Security and Medicare. On $50,000 in profit, you're looking at roughly $7,065 in self-employment tax alone, before income tax.

Smart tax planning starts with quarterly estimated payments to avoid year-end surprises. Set aside about 30% of your profit and pay the IRS every quarter using real-time projections. Once your consistent annual business income approaches $80,000, an S Corp election typically saves $8,000+ annually by splitting your income into salary and distributions because only the salary portion faces self-employment tax.

Starting a Sole Proprietorship: Frequently Asked Questions

Running your creative business shouldn't feel like solving tax puzzles. Whether you're a designer, consultant, or freelancer, these answers address the practical questions that keep you up at night, so you can focus on what actually grows your income.

Do I need a business license to run a sole proprietorship?

Your location and industry determine license requirements, not your business structure. Most creative professionals need local business licenses from their city or county. Check with your local authorities and professional licensing boards. The IRS doesn't require federal licenses for most service businesses.

How should I separate business and personal finances as a sole proprietor?

Open a dedicated business checking account immediately. Keeping separate accounts simplifies recordkeeping and supports proper tax treatment. Personal expenses paid from business accounts are generally not deductible; not keeping personal expenses separate from business expenses creates unnecessary tax complications.

When should I switch from a sole proprietorship to an S Corp?

Think about switching to S Corp status when your annual business income consistently hits $60,000 to $80,000. At this threshold, paying yourself a salary plus taking distributions typically saves $8,000+ annually in self-employment taxes. The tax savings usually outweigh the additional administrative requirements.

Do I need an EIN as a sole proprietor?

An EIN isn't required unless you have employees, but getting one protects your Social Security number on business documents. Apply directly through IRS.gov; avoid third-party services that charge fees. You'll need an EIN later if you convert to an LLC or elect S Corp status.

What tax forms do sole proprietors file?

Report business income and expenses on Schedule C this form is attached to your Form 1040. You'll also file Schedule SE for self-employment tax and Form 1040-ES for quarterly estimated payments. Unlike corporations, sole proprietors don't file separate business tax returns.

Grow Smart: When to Upgrade to an S Corp (And How to Make It Effortless)

As your profit grows, S Corp taxation can become a more efficient option by reducing the share of your income subject to self-employment tax. You can elect S Corp status at any point in the year by filing Form 2553, and earlier elections typically mean earlier savings.

Lettuce simplifies the entire transition. The platform handles LLC formation, S Corp election filing, payroll automation, and estimated tax payments, so you can upgrade your structure without managing the paperwork.

Ready to run a more efficient business-of-one? Get started today and let Lettuce calculate your potential tax savings and automate your compliance from day one.