Key Takeaways

  • An individual business is a non-incorporated entity run by one person, including freelancers, consultants, and independent contractors.
  • Independent contractors are defined by the IRS based on how much control they have over their work methods.
  • Sole proprietorships are the most common form of individual business; they are easy to establish but carry unlimited personal liability.
  • Even individual businesses must comply with business law, including contracts, licensing, tax obligations, and labor regulations.
  • Incorporated entities like partnerships and corporations provide liability protection but require formal filings and compliance with additional laws.
  • Legal areas affecting individual businesses include contract law, intellectual property, employment regulations, tax compliance, and consumer protection.

An individual business is a business that is not incorporated. This includes independent contractors, consultants, and freelancers. To register as an individual business, a United States Social Security number is used. Sometimes personal businesses are referred to as "solopreneurs."

Who Is Considered an Independent Contractor?

A person may be considered an independent contractor for tax purposes, dependent on certain circumstances. The distinction lies in who has control of your time and the processes in which your job is completed. If the person that is contracted to pay you only tells you what the results should be, but you have freedom over how these results are acquired, you are likely considered an independent contractor.

Typically, those required to be at a certain place, at a certain time, to complete their work are considered employees, not independent contractors.

Common examples of professions that are often independent contractors include therapists, accountants, chiropractors, and graphic designers. Those hired on a freelance basis are typically independent contractors by IRS standards and may also be sole proprietorships.

Legal Obligations for Independent Contractors

Independent contractors operating as an individual business are still subject to a wide range of legal and regulatory requirements. They must:

  • Comply with tax obligations by paying self-employment tax and filing quarterly estimated taxes.
  • Draft and honor contracts with clients, ensuring terms such as payment schedules, project scope, and deadlines are clearly defined.
  • Obtain necessary licenses or permits if their work requires it (e.g., real estate agents, medical professionals).
  • Protect intellectual property, including copyrights or trademarks for creative work or business branding.
  • Follow labor laws, especially when hiring subcontractors, to avoid misclassification or wage disputes.

These responsibilities highlight that even though contractors maintain autonomy, they are not exempt from legal compliance.

Sole Proprietorships

A sole proprietorship is when a business only has one owner that receives all the profits. If there are any problems, such as getting sued or an unpaid debt, this owner would be responsible as an individual. Contractors, consultants and freelancers also use this. It is the easiest type of business both to set up and to dissolve. A sole proprietorship is not incorporated, and business income and expenses are reported on Form 1040 Schedule C.

In the eyes of the law, a sole proprietorship and the business who owns it are not separate entities. A sole proprietor is required to report any income from the business, less business expenses. It is also required that owners of sole proprietorships pay self-employment taxes.

In the United States, setting up a sole proprietorship is relatively quick and easy.

  • While it does not require any federal filings, your city or county may require that you obtain a license if you plan to operate under a fictitious business name, or you may need to register the name with the secretary of state's office.
  • Another requirement will be to get an EIN (Employer Identification Number) if you plan on hiring employees for your business. It is also highly recommended to open a banking account solely for the business.

Most people who venture into self-employment chose a self-proprietorship of some sort. This single owner will provide any capital (or take out a loan), be the face of the company, and solely take on the risk. For a sole proprietorship, there is no formal act of foundation needed and no minimum capital requirement.

A sole proprietor is always personally liable for business debts and obligations with no limitations, even if business and individual accounts are kept completely separate. The owner's spouse can even be held accountable for business debts.

A sole proprietorship that has a turnover of 100,000 CHF or more is required to register an inscription in the Commercial Registry. For those businesses under this threshold, it is voluntary. Some professions are exempt from this requirement, such as medics and lawyers.

Those in the Commercial Registry are also required to follow the rules for Commercial Accounting through double entry accounts with:

  • Inventory
  • Balance
  • Profit and loss statement.

Even for businesses that are not registered, it is a good idea to keep good records for many reasons.

Legal Risks and Protections for Sole Proprietors

While sole proprietorships are simple to establish, they carry significant risks because the owner and the business are legally the same entity. This means:

  • Unlimited personal liability—the owner’s personal assets can be used to satisfy business debts or lawsuits.
  • Exposure to civil and criminal law—civil cases might involve breach of contract or employee disputes, while criminal law applies in cases like fraud or tax evasion.
  • Contract enforcement—sole proprietors often rely on contracts with clients, suppliers, or landlords, making contract law a cornerstone of their business operations.

To mitigate these risks, many sole proprietors:

  • Purchase liability insurance.
  • Use detailed contracts to define expectations and protect against disputes.
  • Separate business and personal finances to maintain clearer records.

Incorporated Businesses

There are different types of incorporated businesses. Your business is a partnership if it is incorporated as a partnership. A partnership files business income and expenses on Form 1065. Partnerships are considered separate entities from their owners. A partnership must have at least two shareholders and at least one general partner who assumes unlimited liability for the business. In a partnership, all profits and losses are distributed directly among the shareholders.

Your business is a corporation if it is incorporated and you file your income and expenses using Form 1120 or 1120s. Shareholders within a corporation have the protection of limited liability. Corporations also have full control of their profits and whether they are kept or distributed.

Corporations must have at least one shareholder and be for-profit businesses. They are able to operate for an unlimited amount of time at a loss.

Business Law Areas That Affect All Business Types

Regardless of whether a company is an individual business or an incorporated entity, several areas of law apply universally:

  1. Contract Law – Governs agreements with clients, suppliers, and employees. Breaches can result in financial losses or lawsuits.
  2. Employment and Labor Law – Even individual businesses with just one employee must comply with wage, hour, and safety regulations.
  3. Intellectual Property Law – Protects business names, logos, inventions, and creative work.
  4. Tax Law – Dictates income tax, self-employment tax, payroll tax, and deductions.
  5. Consumer Protection Law – Ensures fair dealings with customers, including truth in advertising and product safety.
  6. Dispute Resolution – Many businesses use arbitration or mediation to resolve disputes quickly and avoid costly litigation.

These legal frameworks safeguard not only business owners but also employees, consumers, and the public.

Frequently Asked Questions

  1. What is an individual business?
    An individual business is a non-incorporated entity owned and operated by one person, such as a freelancer, consultant, or sole proprietor.
  2. What are the risks of running an individual business?
    The main risk is unlimited personal liability. Owners are personally responsible for business debts and legal claims.
  3. Do individual businesses need licenses?
    Yes, depending on the industry and location, licenses or permits may be required to operate legally.
  4. How are individual businesses taxed?
    Profits are reported on the owner’s personal tax return. Sole proprietors also pay self-employment taxes.
  5. How can sole proprietors protect themselves legally?
    They can use contracts, liability insurance, and proper recordkeeping to reduce risks and ensure compliance with laws.

If you need help with an individual business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.