Sole Proprietorship

If you work as a freelancer and take freelance contracts, you’re operating as a sole proprietor, meaning you and your business are legally the same. It can be anyone, for example, a freelance writer, an events planner, a business advisor, etc. Many continue to operate as sole proprietors while maintaining this status for their side hustle.

A sole proprietorship differs from a corporation or an LLC because it doesn’t create a separate legal entity, which makes the owner liable for any liabilities incurred by the business. However, when a sole proprietor decides to incorporate their business, they typically restructure it into an LLC.

Beneficial ownership isn’t hidden when it comes to a sole proprietorship because it’s not a separate legal entity. However, in most jurisdictions, a standard Know Your Customer (KYC) verification workflow is still required, regardless of whether the sole proprietor has an Employer Identification Number (EIN). This is an onboarding measure that verifies their name, date of birth, address, and SSN using a document verification process or a combination of this with selfie checks. 

Unlike with sole proprietors, LLCs are required to be checked through a proper Know Your Business (KYB) process, which is similar to KYC, just oriented at company (corporate entity) verification. KYB means verifying the LLC’s legitimacy by checking it against business identity data sources, which includes running the Ultimate Beneficial Owners (UBOs) through KYC and anti-money laundering (AML) screening procedures, such as PEPs and sanctions checks. 

The goal here is to ensure that neither the LLC nor its beneficial owners appear on sanctions lists and complete the verification process for all beneficial owners.

Sole proprietors must report both their income and expenses on their personal income tax return. Unlike employees, who have their Medicare taxes split between themselves and their employer (company), sole proprietors are responsible for paying this themselves; otherwise, they face penalties.

The disadvantages that most sole proprietors note are the responsibility and self-employment taxes. They are responsible for investments, business debts and obligations, including loans, leases, credit accounts, and even lawsuits. If a sole proprietor has employees, they are also liable for their actions. If the business is highly profitable, sole proprietors will face higher taxes.

Yes, in practice, the salary is their business income, which is treated as the sole proprietor’s personal income. Despite that, even if the person has a separate business account to draw their salary, they will be taxed the same amount.