Starting a sole proprietorship is one of the easiest ways to begin a small business. Excepting local permits, sole proprietors have little to worry about when it comes to official obstacles to beginning their business. This is in contrast to the complex start-up process of limited liability companies, partnerships, and corporations. The lack of separate taxes and paperwork has many advantages, including the need for less start-up capital, and less complex daily management. For some, the tax structure of sole proprietorships are the most beneficial part. Unlike LLCs and corporations, sole proprietorships are subject to what are called pass-through tax rules. When a sole proprietor files taxes for his or her business, it is filed as part of their personal taxes. On the other hand, earning for corporations are taxed twice. They are taxed first as a corporation and then second through the personal taxes of their employees.
How Sole Proprietor Taxes Work
A sole proprietorship is taxed as if it was personal income. When the owner files their own taxes, the profits from their business is recorded as a profit from a business under Schedule C, rather than as personal wages. In addition, sole proprietors can claim business expenses such as equipment, travel, and advertising as tax deductible. Unfortunately, money which is saved in order to fund future investments is taxed. For this reason, many business owners decide to forego the ease of sole proprietor taxes and create a corporation. The trade-off for the more complex tax structure is the chance to save thousands of dollars at the end of the year on tax-deductible savings. While this is a good way to save money, it is often not worth it for the work involved in dealing with strict record-keeping and complicated taxes.
If you are starting a business and are unsure of which tax structure is most ideal for you, you may want to consult with a knowledgeable and qualified tax attorney. A trusted attorney can help you learn more about your options and make an informed decision about your business’s future.
With the exception of local permits, sole proprietors have no obstacles to begin their business when they please. This separates them from limited liability companies and corporations, which both have their own respective paperwork and separate taxes to file. There are very apparent advantages to such an arrangement, as the start-up cost and time are significantly lessened, and day to day management of the business is less complex.
Depending on your preference, the tax setup for sole proprietorships is also a benefit. Instead of the complicated tax structure of the LLC, and the even more complicated tax structure of corporations, the businesses of sole proprietors are taxed according to pass-through rules. This means that the business’s taxes are filed alongside the personal taxes of the proprietor.
How Sole Proprietor Taxes Work
The profits of a sole proprietor business are taxed in the same way personal income is taxed. The only difference, is that rather than marking the profits as wage income, it is reported as a profit from a business on Schedule C. Likewise, losses are listed in the same schedule. The expenses you use to pay for advertising, equipment, running the business, and business travel are all tax deductible. However, money you have saved at the year’s end meant for future investment is still taxable. This is one of the main reasons people choose the more complicated tax structure of corporations.
Becoming a corporation allows a person to create a separate legal entity for their business, allowing them to avoid these types of taxes. This also allows the business ownership to be easily transferred when the owner wants to retire or unfortunately passes away. While money can be saved this way, many people prefer to avoid the headaches involved with the more complicated tax structure and the need to keep meticulous records. Another important point about sole proprietor taxes is that you will need to pay self-employment taxes.
If you are a sole proprietor and you are considering incorporating your business to save on taxes, a tax lawyer may be able to help you make informed decisions about your move to a more complex structure.