A sole proprietorship can be extremely appealing for many reasons. It's typically an easy way to start a business in the US, and this business structure doesn't usually have a ton of complicated paperwork to get set up. While it might be ideal to start, as your business grows, you may ask yourself: Can a sole proprietor hire employees? The short answer is yes, but it comes with specific responsibilities.
What Is a Sole Proprietorship and How Does It Work?
A sole proprietorship is a business owned and run by one person. There’s no legal separation between the business and the owner. This means that the owner is personally responsible for all liabilities and debts incurred by the business.
Even though it’s called a “sole” proprietorship, that doesn’t mean you must work alone. But can sole proprietors have employees? Keep reading to find out.
Can Sole Proprietors Hire Employees?
Yes, sole proprietors can hire employees. There’s no legal limit on the number of workers you can bring on, whether full-time, part-time, or seasonal. Hiring employees enables you to take on more work, deliver better service, and grow more quickly.
However, can you be a sole proprietor and have employees while still successfully running your business? The answer depends on how you address the unique responsibilities and regulations involved with hiring employees, which we'll talk about next.
What Are the Legal Responsibilities of Hiring Employees?
Hiring employees as a sole proprietor means you'll have to take on the same legal obligations as any employer. These include:
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Getting an Employer Identification Number (EIN) from the IRS.
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Withholding and paying employment taxes, such as Social Security and Medicare.
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Complying with wage and hour laws, workplace safety rules, and anti-discrimination regulations.
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Reporting new hires to your state’s employment agency.
Even as a sole proprietor, these responsibilities are non-negotiable and must be handled correctly to avoid fines or legal trouble.
How to Pay Employees as a Sole Proprietor
Running payroll involves more than cutting a check. Here's what you’ll need to do:
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Collect employee forms: Each employee must complete IRS Form W-4 and Form I-9. Some states may have additional forms.
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Calculate pay: Determine the gross wages, then deduct the proper amount for federal, state, and local taxes.
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Distribute paychecks: Use direct deposit or paper checks, following your state’s pay frequency laws.
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Remit payroll taxes: Send withheld taxes to the IRS and your state’s tax agency.
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Keep records: Maintain payroll records in case of audits or disputes.
You can use payroll software or hire a payroll provider to help you stay on track.
What Insurance and Licenses Do Sole Proprietors Need?
Bringing on employees means meeting certain local and state requirements:
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Workers’ compensation insurance: Required in most states once you hire your first employee.
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Business licenses or permits: Some industries and locations require additional licensing to operate legally.
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Labor Law Posters: Employers are required to display posters outlining workplace rights, minimum wage, and safety regulations.
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New Hire Reporting: States require employers to report new hires, typically within 20 days.
These requirements protect you and your employees and should be reviewed before hiring.
Difference Between Employees and Independent Contractors
- Sole proprietors can work with both employees and independent contractors; however, they are distinct entities.
- Employees follow your schedule and direction and are protected by labor laws. You are responsible for their taxes, insurance, and benefits.
- Independent contractors control how and when they work, and they are responsible for handling their own taxes. You pay them by invoice, not through payroll.
- Misclassifying a worker can lead to serious consequences; therefore, ensure you understand the rules.
Why Hire Employees as a Sole Proprietor?
Can a sole proprietor have employees and still manage all aspects of business affairs adequately? Yes. Onboarding employees can help you handle more work, improve customer service, and scale your business more efficiently. When you’re no longer able to manage every task on your own, bringing in help allows you to focus on long-term goals instead of day-to-day operations. A reliable team makes it easier to meet client demands, take on larger projects, and grow your reputation. For many sole proprietors, hiring employees marks a turning point, signaling a shift from merely surviving to thriving.
What to Consider Before Hiring Your First Employee
Before you start recruiting, ask yourself:
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Can I afford it? Make sure your income can support wages, payroll taxes, and other costs.
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Do I have enough work? Don’t hire just to have help—there should be consistent demand.
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How many employees can a sole proprietor have, and how many is sufficient for the business's needs?
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Am I ready for the responsibility? Managing people takes time, patience, and planning.
A slow or part-time hire can be a good way to test whether you’re truly ready to take on staff.
When to Switch From a Sole Proprietorship to an LLC
While a sole proprietorship can support a small team, can a sole proprietor have employees and still have the legal protection or flexibility needed as the business grows? If you're hiring multiple employees, managing significant assets, or taking on more financial risk, it might be time to convert your sole proprietorship to an LLC (Limited Liability Company) to protect against lawsuits or debts and enhance your business’s credibility. For many owners, switching to an LLC becomes a natural next step when expansion requires stronger safeguards.
Final Thoughts on Hiring Employees as a Sole Proprietor
We hope we’ve sufficiently answered the question, “Can I be a sole proprietor and have employees?” and addressed various concerns you may have about this issue. To be sure, sole proprietors can absolutely hire employees, and many do. It’s a strong sign of business growth, but it requires careful planning. As long as you stay compliant with tax laws, employment regulations, and local requirements, you can build a team and grow your business responsibly.