Sole Proprietorship Description

A sole proprietorship consists of one individual who carries on an unincorporated trade or business.

Sole Proprietorship Tax Election

Net profit or loss is computed on Schedule C and is reported as income or loss on the owner’s Form 1040.

Wages & Self Employment Tax

The owner is subject to Self Employment tax of 15.3% of net earnings from self-employment.

Business Losses

Business losses can offset other income such as interest, capital gains or a spouse’s wages if filing a joint return.

Fringe Benefits

Amounts paid on behalf of employees are deductible; those paid on behalf of proprietor are not.  There are some exceptions.

Bookkeeping & Accounting

In sole proprietorship tax election there are fewer requirements on what type of bookkeeping system or accounting method is used.  The system must be consistent, clearly reflect income and expenses, and allow the taxpayer to file an accurate return.  The sole proprietor must use the same tax year as the owner.

Transfer of Ownership

A sole proprietorship is not a separate entity from its owner.  “Sale” of a sole proprietorship is actually a sale of assets.

Sole proprietorship tax election considerations include the number of individuals involved in the business, and the advantages and disadvantages inherent in the type of entity.

Business Advantages

  • Minimum legal restrictions
  • Easy to discontinue

Business Disadvantages

  • Unlimited personal liability
  • May not bring in new owners or outside capital contributions
  • Income tax cannot be deferred by retaining profits

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