What it is:
A sole proprietorship is a way to do business, but it is not a business entity per se. A sole proprietor’s business has no identity separate from the proprietor. It’s simply an individual engaged in business. It’s that simple. The business has no legal life of its own.
Who can do this:
Any individual engaged in a trade or business can operate as a sole proprietor. If you are an individual doing business who took no steps to create a different type of entity, you may already be a sole proprietor. 
Who handles what:
Basically, it’s all you. You may hire employees.
To Whom You Are Responsible:
If you are a sole proprietor you are responsible to clients and customers, creditors, and anyone who incurs injury as a result of your goods or services, or your wrongful or negligent actions.
And let’s be clear about this, because this is a big deal: because there is no distinction between you and your business, you are personally liable for all debts, obligations, and liabilities that arise in connection with your enterprise. You have unlimited personal liability. This means that if you have personal assets, they are at risk. Before you proceed with a sole proprietorship, please consider your exposure.
In most states, you generally owe an implied contractual duty of good faith and fair dealing in carrying out the terms of any agreement into which you enter. 
You are responsible for complying with any and all laws, rules, regulations, and procedures applicable to your business endeavors and practices.
Your power to affect the business structure:
There are no structural issues to address. 
How long your business lasts:
Your business lives and dies with you.
How you get paid:
A sole proprietor earns wages or makes personal withdrawals from the business’s earnings. 
Business earnings are the proprietor’s personal property. The proprietor is self-employed, not an employee of the business. Technically, earnings need not be separated from the proprietor’s other funds because there is no separation between the proprietor’s business and person, but maintaining separate accounts will likely support accounting, tax reporting, and business management.
You must generally keep track of your income and expenses consistently from year to year using a cash, accrual, special, or hybrid accounting method selected when you file your first tax return. You must maintain accurate accounts throughout the life of your business, and keep any receipts and evidentiary records necessary to support your accounting entries.  Please consult an accountant regarding applicability of accounting requirements to your particular circumstances.
Generally, sole proprietors may file federal tax returns using a social security number as a tax identification number. However, if you have employees you must register for and use a federal Employee Identification Number (EIN).  When you fill out your forms, you must use the applicable IRS business code. 
A sole proprietor pays income tax and self-employment tax, estimated tax if applicable, excise taxes if applicable, and any applicable employer withholding taxes. 
You may deduct the costs of ordinary and necessary business expenses,  including reasonable wages paid to employees.  You cannot deduct your own wages. 
If before doing business as a sole proprietor you filed tax returns according to a calendar year, unless you get IRS permission to change your tax year you must generally continue to file your sole proprietorship income tax using a calendar year.
You must file federal and state tax returns, and make required tax payments.
Please consult an accountant or other tax professional regarding the applicability of tax requirements to your unique circumstances.
Required Annual State Business Filings and Formalities:
There are generally no annual state business reports to file, requirements to fulfill, or entity fees to pay.
A sole proprietorship is simpler and less costly to form and maintain than other entities. However, the costs of unlimited liability exposure may be great. Insurance coverage will likely be an important practical consideration.
 If you are engaged with continuity and regularity in an activity for profit, you are likely engaged in a trade or business for U.S. tax purposes, and may already be a sole proprietor. See Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), (defining engagement in a trade or business). Not all income producing or profit-making activities are business endeavors. Id. Sporadic activities, hobbies, or amusements are not trades or businesses. Id.
 You do not owe this duty by virtue of being a sole proprietor, but by virtue of entering into contracts. See, e.g., Restatement (Second) of Contracts, § 205 (1979) (stating that “every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.”); UCC § 1-304 (!977) (“[E]very contract or duty within the [UCC] imposes an obligation of good faith in its performance and enforcement.”); UCC § 1-201(19) (1977) (“Good faith means honesty in fact in the conduct or transaction concerned.”); UCC § 2-203(b) (1977) (“Good faith in the case of a merchant means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”); See also, Ronald B. Kowalczyk & Melissa Piwowar, The Application of the Implied Covenant of Good Faith and Fair Dealing in Contract Cases, 16 J. DuPage County B. Ass’n (2003-04), available at http://www.dcbabrief.org/vol161203art1.html.
 Of course, the softer aspects of your business structure are still addressed through your intangibles, relationships, systems, processes, and organizational practices; your innovation and creativity, the culture you create, your personality and “brand”, the reputation you cultivate, the good will you develop, the rhythms and routines you establish, your administrative organization, your strategy, growth, and development, etc.
 Some basic information regarding paying yourself is available on the IRS’s “Paying Yourself” web page: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Paying-Yourself#2. New business proprietors might also want to take a look at the IRS’s “Starting a Business” page: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Starting-a-Business, and their “Business Taxes” page: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Business-Taxes.
 I.R.S. Pub. 538, Accounting Periods & Methods 8 (2012), available at http://www.irs.gov/pub/irs-pdf/p538.pdf.
 See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Employer-ID-Numbers-(EINs) (for general information regarding EINs). See http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Apply-for-an-Employer-Identification-Number-(EIN)-Online (to apply online through the IRS website).
 The IRS provides a list of Principal Business or Professional Activity Codes within the instructions for Schedule C (Form 1040). A sample copy of business codes as included in the 2012 instructions is available here: http://www.irs.gov/pub/irs-pdf/i1040sc.pdf.