How to start a sole proprietorship business from scratch

Launching a sole proprietorship is a rewarding venture, blending your unique skills with sharp business savvy. The path to market is often more direct due to simpler structures and lower initial costs, but this accessibility doesn't guarantee success.

This guide will take you through the practical steps of validating your business concept, securing funding, obtaining the right permits, and acquiring equipment to help you launch a successful sole proprietorship business in the U.S.

Step 1: Plan and validate your business idea

Before you spend a dollar, confirm people will buy what you sell. Use a free tool like Google Forms to create a short survey. You can then share it in local online communities or forums to get feedback from at least 30-50 potential customers, not just friends and family.

Analyze your competition

Identify three direct competitors. For local businesses, use Google Maps to find them. For online ventures, a resource like Ubersuggest can show you their top keywords. Look at their pricing, services, and customer reviews to find a gap you can fill.

Estimate your startup costs

Your initial investment can be modest, but you need a clear budget. A frequent misstep is to underestimate these early expenses. You might want to consider these typical cost ranges for a new sole proprietorship.

• DBA Registration: $10 - $100, depending on your state.
• Basic Website: $200 - $1,000 for a simple, professional site.
• Initial Marketing: $100 - $500 for business cards or online ads.
• Software Subscriptions: $30 - $150 per month for accounting or project management.

Here are 4 immediate steps to take:

• Survey at least 30 potential customers about your proposed service or product.
• List three competitors and document their pricing and primary service offering.
• Create a detailed startup budget based on the cost ranges above.
• Set aside an extra 15-20% in your budget as a contingency fund.

Step 2: Establish your legal structure and get licensed

By default, you are a sole proprietor. You might want to consider forming a Limited Liability Company (LLC) to protect your personal assets, like your home or car, from business debts. You can file for an LLC on your state’s Secretary of State website for $50-$500.

Both structures have simple tax implications. Your business profits “pass-through” to you, and you report them on a Schedule C form with your personal 1040 tax return. A big mistake is to mix personal and business funds, so open a separate business bank account right away.

Secure the right permits and licenses

If you operate under a trade name, you must register it as a "Doing Business As" (DBA). Also, get a free Employer Identification Number (EIN) from the IRS if you plan to hire anyone. Most sole proprietors do not need other federal licenses.

Check with your city clerk and state licensing board for local business operating licenses or professional permits. These can cost between $50 and $400 annually, and processing may take a few weeks. Operating without one can lead to fines, so do not skip this step.

Here are 4 immediate steps to take:

• Decide if you will operate as a sole proprietorship or form an LLC.
• Register a DBA name with your state or county if you use a trade name.
• Apply for a business operating license through your local city or county office.
• Open a separate bank account specifically for your business income and expenses.

Step 3: Protect your business with insurance

You should start with general liability insurance. This covers claims of bodily injury or property damage. For most sole proprietors, a policy with $1 million in coverage is a solid starting point, with annual premiums typically between $400 and $900.

If you provide professional services or advice, you might also want to consider professional liability insurance. This protects you from claims of negligence or mistakes. Coverage of $1 million often costs between $500 and $1,500 per year.

Many new owners make the mistake of choosing the lowest premium, only to find their coverage is inadequate when a claim arises. Always check that the coverage amounts are sufficient for your potential risks before you commit to a policy.

Find the right insurance provider

You can get quotes from providers that focus on small businesses, such as The Hartford, Hiscox, or Next Insurance. It pays to compare at least three different quotes to find the best balance of coverage and cost for your specific operation.

Here are 4 immediate steps to take:

• Assess if you need general, professional, or other specific insurance types.
• Get a quote for a $1 million general liability policy.
• Compare offers from at least three different insurance providers.
• Read your chosen policy to confirm it covers your specific business risks.

Step 4: Set up your location and equipment

Many sole proprietors start from a home office. To claim a tax deduction, the IRS requires your space be used exclusively and regularly for business. If you need a commercial spot, check local zoning laws for classifications like C-1 (retail) or C-2 (office).

Acquire your business equipment

Your equipment needs will vary, but a reliable computer ($800 - $2,000) and a dedicated business phone line ($20 - $50 per month) are typical starting points. A frequent misstep is to use personal equipment, which can complicate tax records. Always keep business assets separate.

If you need a commercial lease, you might want to negotiate for a shorter initial term of 1-2 years. Also, ask about a Tenant Improvement (TI) allowance. This is a sum the landlord provides to help you customize the space for your business needs.

When you evaluate suppliers for physical goods, pay close attention to their Minimum Order Quantities (MOQs) and payment terms. Some may require large upfront orders or have strict payment schedules that can strain a new business’s cash flow. It pays to compare options.

Here are 4 immediate steps to take:

• Designate a specific area in your home as your office.
• Create a detailed list of necessary equipment with projected costs.
• If you need a commercial space, start researching local zoning codes.
• Research and compare at least two suppliers for any physical products you sell.

Step 5: Set up your payment processing

You need a reliable way to get paid. Many sole proprietors require payment upon service completion. For larger projects, you might want to consider a 50% upfront deposit to cover initial costs. This helps protect your cash flow.

When you evaluate payment solutions, look for transparent pricing and no long-term contracts. Many new business owners get caught by high transaction fees or monthly charges that eat into their profits. It pays to compare your options carefully.

For sole proprietors who need to accept payments on-site or on-the-go, JIM offers a streamlined solution. With JIM, you can accept debit, credit, and digital wallets directly through your smartphone. Just tap and you are done.

At just 1.99% per transaction with no hidden costs or extra hardware needed, it's a strong offer. Other providers often charge between 2.5% and 3.5%. This makes JIM particularly useful for service providers like consultants or mobile repair technicians.

• Get Started: Download the JIM app for iOS.
• Make a Sale: Type the sales amount, hit sell, and ask your customer to tap their card or device on your phone.
• Access Funds: Your money is available right on your JIM card as soon as the sale is done. There is no waiting for bank transfers.

Here are 3 immediate steps to take:

• Decide on your payment terms, such as payment on completion or a 50% deposit.
• Compare the transaction fees of at least two payment solutions.
• Download the JIM app to explore its features for on-the-go payments.

Step 6: Fund your business and manage finances

You might want to start with the SBA Microloan program. It provides loans up to $50,000 through local nonprofit lenders. You will likely need a credit score of at least 620 to qualify, with interest rates often falling between 8% and 13%.

For smaller needs, a platform like Kiva offers 0% interest crowdfunded loans up to $15,000. You could also look for grants. Check Grants.gov for federal opportunities or specific programs like the Amber Grant for women-owned businesses.

Plan your working capital

Many new owners focus on startup costs and forget about day-to-day expenses. You should have enough cash to cover at least six months of operations. If your monthly expenses are $2,000, you need $12,000 in working capital to stay afloat while you build your client base.

Here are 4 immediate steps to take:

• Calculate your total operating expenses for a six-month period.
• Check your credit score to see where you stand for loan applications.
• Research one SBA Microloan lender that serves your area.
• Search Grants.gov using keywords related to your business type.

Step 7: Hire your team and streamline operations

Bring on your first team member

When you spend over 10 hours a week on non-billable tasks, you might want to hire a contractor. A Virtual Assistant (VA) can handle administrative work for $15-$30 per hour. A bookkeeper can manage your finances for $20-$40 per hour. You can find them on platforms like Upwork.

A frequent misstep is to hire without a clear agreement. Always use a contract that outlines specific duties, deadlines, and payment terms. This prevents misunderstandings and protects both you and the contractor from future disputes.

Set up your operational systems

You can use free or low-cost software to manage your workflow. A project management app like Trello or Asana helps you track tasks and deadlines. For client-facing businesses, a scheduling app like Calendly lets customers book appointments directly, which saves you time on back-and-forth emails.

Here are 4 immediate steps to take:

• Draft a job description for a virtual assistant outlining key tasks.
• Find and download a standard independent contractor agreement template.
• Set up a free project board on Trello to organize your business tasks.
• Create a Calendly account and link it to your business calendar.

Step 8: Market your business and get customers

Start with your digital storefront. Claim your free Google Business Profile and fill out every section. This action puts you on the map for local searches. Aim to get your first 5-10 customer reviews within 60 days to build immediate trust.

Focus your outreach efforts

You do not need to be on every platform. Pick one channel where your customers spend their time. If you sell services to other businesses, a targeted LinkedIn message campaign can work well. For a local service, consider partnering with a non-competing business for cross-promotions.

A frequent misstep is to spread your budget too thin across many channels. You might find more success if you master one or two first. Track your Customer Acquisition Cost (CAC) by dividing your monthly marketing spend by the number of new customers you gained.

Here are 4 immediate steps to take:

• Claim and complete your Google Business Profile.
• Ask your first five customers for an online review.
• Choose one social media platform and create a content plan for your first month.
• Calculate your CAC after your first marketing campaign.

Step 9: Price your product or service

Your pricing sends a message about your brand’s value. Before you set any numbers, research what three of your direct competitors charge. Look beyond the price tag to see what is included, such as support or delivery, to understand the value they offer.

Choose your pricing model

For services, you might want to charge by the hour or by the project. A consultant could charge $75-$150 per hour. A flat project fee, however, gives clients price certainty. Many new owners underprice their work to attract clients, which can make it hard to be profitable later.

If you sell physical goods, a cost-plus model is straightforward. Calculate your total cost per item, then add your desired profit margin. A retail markup is often between 50% and 100%. For example, an item that costs you $20 could sell for $30 to $40.

Here are 4 immediate steps to take:

• Document the prices and services of three direct competitors.
• Choose between an hourly, project-based, or cost-plus pricing model.
• Calculate your price for one core service or product, including your profit margin.
• Write a short script to explain your pricing and its value to a potential client.

Step 10: Maintain quality and scale your operations

To deliver consistent results, create a simple quality checklist for your main service or product. This internal guide ensures you follow the same high standards for every client, which helps build a strong reputation for reliability and earns you repeat business.

Measure what matters

You can track your performance with a simple post-project survey to get a customer satisfaction score. An average rating of 4.5 out of 5 is a great target. Also, watch your client retention rate. If more than 60% of your business comes from past clients, you are doing well.

Once your quality is consistent, you can plan for growth. If you find yourself working over 50 hours a week or turning down more than two ideal clients per month, it is a clear signal that it is time to expand your capacity.

Scaling often means hiring a contractor or investing in better systems. A frequent misstep is to hire without documenting your workflow, which can cause quality to drop. You might want to reinvest 20% of your profits into growth tools like a CRM to manage client data.

Here are 4 immediate steps to take:

• Create a quality control checklist for your primary service.
• Set up a one-question survey to track customer satisfaction.
• Define the weekly hour limit that will trigger your search for a contractor.
• Document one key business process you could delegate to a new hire.

Launching your sole proprietorship is a direct path to market. The key is to stay nimble and adapt as you learn from your first customers. You have the roadmap, now it is time to take that first step with confidence.

To make payments simple, JIM lets you accept cards right on your phone. There is no extra hardware, just a flat 1.99% transaction fee. It helps keep your cash flow simple from day one. Download JIM and see for yourself.