A sole proprietorship is an unincorporated business owned by one person, where the owner and the business are the same legal entity. There is no separation: the owner keeps all profits, reports them as personal income, and is personally liable for all debts.
If you engage contractors internationally, most of them are sole proprietors. That structure has two practical consequences for you, and both are worth understanding before you sign anything. Last updated September 2026.
| Sole proprietorship | Limited company | |
|---|---|---|
| Legal separation from owner | None | Yes |
| Liability for debts | Personal and unlimited | Limited to the company |
| Setup | Minimal, often none | Registration required |
| Tax | Reported as personal income | Corporate, then distributions |
| Continuity | Ends with the owner | Continues independently |
A business owned and run by one individual, with no legal distinction between the two. Also called a sole trader, individual entrepreneurship or simply a proprietorship, depending on the country.
It is the simplest business structure that exists. In many countries you become a sole proprietor by starting to trade, with no registration at all, although you may need to register a trading name if you operate under something other than your own.
It begins when the owner decides to trade and ends when they stop or die. There is no entity to continue.
Complete control. One person makes every decision.
All profits to the owner. No shareholders, no partners.
Personal income tax. Business profits are reported on the owner's personal return rather than taxed separately.
Unlimited liability. This is the significant one. Because there is no legal separation, business debts are personal debts. Personal assets, including a home, can be at risk.
Minimal administration. Little or no registration, fewer filing obligations, lower running costs.
Freelance writers, designers and developers working project to project for several clients.
Trades such as carpenters, electricians and landscapers operating on their own account.
Independent consultants offering expertise built over a previous career.
Local service businesses such as dog walking, tutoring or catering.
The common thread is low capital requirement and low risk exposure. As a business grows, or as liability exposure increases, most owners incorporate.
Two things, and they are the reason this matters to an employer rather than to an entrepreneur.
A sole proprietor working full time, exclusively for one client, on that client's schedule, using that client's equipment, looks like an employee to most tax authorities regardless of how they describe themselves.
The fact that they are registered as a business does not protect you. Most jurisdictions apply a control test to the working relationship, not to the counterparty's legal structure. The IRS test turns on who controls what is done and how.
The risks and the tests are covered in the risks of hiring global contractors.
If something goes wrong, there is no company to pursue, only an individual. Equally, a sole proprietor has no corporate protection, which is part of why long exclusive engagements often end with them asking to be employed.
Where that is the right outcome, an Employer of Record can employ them in their own country without you setting up an entity. See how contractor conversion works.
Considerably. Registration requirements, tax treatment, social security obligations and the point at which a sole proprietor must register for VAT or its equivalent all differ.
Some countries have specific intermediate structures between sole trader and company. Some require registration from the first invoice. Some impose social contributions on the self-employed that materially change the economics of contracting.
Country-level requirements are in CountryPedia.
We employ people on your behalf across 214 countries and territories, handling contracts, payroll, benefits and compliance, and we can tell you whether a working relationship is genuinely contractor or actually employment before it becomes a liability.
Talk to our team about the people you are engaging.
An unincorporated business owned by one person, with no legal separation between the owner and the business. The owner keeps all profits, reports them as personal income and is personally liable for all debts.
Unlimited liability. Because there is no legal separation, business debts are the owner's personal debts, and personal assets can be pursued to satisfy them.
Not quite. Sole proprietorship is a business structure; contractor describes a working relationship. Most independent contractors operate as sole proprietors, but a sole proprietor may also sell products or serve consumers rather than contracting to businesses.
No. Authorities assess the working relationship, not the counterparty's legal structure. A sole proprietor working exclusively for you, on your schedule, under your direction, may be treated as your employee regardless of how they are registered.
Yes, and many do as they grow or as liability exposure increases. The process and the tax consequences of converting vary by country.
If they are in a country where you have a legal entity, yes, as a normal employee. If not, an Employer of Record can employ them locally on your behalf, which is the usual route when a long contractor engagement should really be employment.