Taxing Sole Proprietorship

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.


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