Sole Proprietorship Taxes

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.


1 Comment

  1. Sole proprietorship taxes can be onerous. However, with the right business structure, the worst tax burdens can be avoided.

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