Sole Proprietor vs. Individual: What's the Difference?

Many independent entrepreneurs, freelancers, and contractors have to face one question: “What is the difference between sole proprietor vs individual?” 

Many people wonder if the two terms are interchangeable, or if there are distinct legal and official differences between the two. This guide will go over all you need to know in the sole proprietor vs individual debate.

What Is a Sole Proprietor?

A sole proprietor is an individual owner of a business. Sole proprietorships, therefore, are businesses that have one clear, distinct owner. This is in contrast to partnerships, which can have many different owners.

Sole proprietors are their own bosses, responsible for all decisions and operations of their businesses, and liable for any debts and claims against the business and the sole recipient of all revenues.

Sole proprietors don't need to register their businesses with the state. There aren't too many added complexities in handling taxes either, so setting up a sole proprietorship is considered one of the easiest ways to start a business.

What Is an Individual?

Terms like "sole proprietor" and "individual entrepreneur" are often used interchangeably, and in many ways, there are many similarities between sole proprietor vs individual. 

You have to be an individual to be a sole proprietor, for example. 

However, even though all sole proprietors are individuals, not all individuals are sole proprietors. Why? Because not all individuals own businesses. The term "individual", from a legal perspective, simply refers to an individual person, with their own taxes, responsibilities, and liabilities.

The term can refer to people from different walks of life and in different professional situations. But the most important factor is that individuals do not always own businesses, and this is what separates them when it comes to sole proprietor vs individual. 

Sole Proprietor vs Individual: Tax Differences

One of the significant areas in which we can differentiate between sole proprietors and individuals is how they file their taxes on a standard W-9 form.

The sole proprietor will need to enter their name on the first line, followed by the business name on Line 2. An individual, however, who isn't necessarily operating their own business, would be able to leave Line 2 blank. 

Then, in Line 3, the person filling the form is asked to tick the right box corresponding to their status. Here, we can see the similarity between individuals and sole proprietors, as they have to tick the same box, labeled, "Individual/sole proprietor, or single-member LLC."

Source: W9manager

So there is a difference here between sole proprietor and individual, but it's only a subtle one.

In addition, sole proprietors are required and expected to attach a Schedule C "Profit or Loss from Business" form when filling out their taxes. In the eyes of the IRS, this is the only thing that truly distinguishes a sole proprietor from an individual.

What to Know About Sole Proprietorship

Several vital aspects make sole proprietorship a unique form of business entity:

• Simple Set-Up - Becoming a sole proprietor is very simple. There are no forms to fill out or registrations to organize, nor will you need to worry about any fees or anything like that. All that changes is how you file your taxes and possibly pay for a separate business name.
• Total Control - Sole proprietors are entirely in charge of their businesses. They're the bosses, able to exert complete authority over every aspect of the company, make all the decisions, and are essentially in charge of all operations. Becoming a sole proprietor can therefore be an enticing vision for those who want to become their own boss and pursue their own vision.
• Liability - As sole proprietor, you are entirely liable for your business. This means that if something goes wrong and a claim is made against the business, that claim is effectively made against you, and your own personal assets, as well as business assets, could be at risk. This is why sole proprietors are encouraged to obtain liability insurance as a priority.
• Revenues Go to You - While they may have to cope with the burdens of the business and any claims or problems, sole proprietors do get to enjoy 100% of the business' revenues. All revenue generated goes straight to you, and it's up to you to decide how that money gets used, reinvested, paid out in salaries for your workforce, and so on.

Sole Proprietorship Can Be a Profitable Path to Follow

As we can see, there are various exciting aspects and benefits associated with a sole proprietorship. It can be a good path to follow for people who want to start their businesses and are willing to take on the responsibilities that come along with being a sole proprietor.

However, you need to prepare appropriately and assume those responsibilities to be successful and avoid any unnecessary issues.

About the Author

Sydney Wess SEO Manager at Clutch

Sydney Wess is a SEO manager who focuses on strengthening organic performance and building topical authority for Clutch.

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