What is a Sole Proprietorship
Business structures: For tax purposes gives a choice of .
- Sole proprietorship
The definition of a sole proprietorship is a business in its simplest form.
Simple and Uncomplicated
Advantages of a Sole Proprietorship
- Sole proprietor and the business use the same tax year.
- Assets for personal use, can immediately be used in the business without a contract
- It's the easiest, fastest, and least expensive business structure. The IRS is notified of your sole proprietorship when you file your tax return.
- Only a sole proprietor allows a simple deduction of home office expenses.
- Allows the most advantageous tax remedy when a husband and wife work in the same business.
- It is easy to change from a sole proprietorship to another structure if necessary.
- Owner is compensated using a distribution of profit. Meaning the business owner can pay himself by writing a cheque whenever money is needed, eliminating the need to write a payroll cheque, withold taxes employment taxes, ect.
If you are considering what your tax advantages and disadvantages with an Limited Liability Company (LLC). Click here
You Are Responsible
- You are personally liable (have good liability insurance)
- Business assets can be confiscated to pay personal debts.
- Audit rates may be higher than for other business entities. (keep detailed records)
- Multiple ownership is not an option.
- Subject to scrutiny under the IRS's hobby rule.
- Profit is subject to self-employment tax. Bottom-line profit is considered earned income and is subject to self-employment tax
- No continuity after death.
Sole Proprietorship, Taxes and Income
Profit made by sole proprietorship is income directly added to the tax return of the self-employed. Any loss is subtracted from other income on the tax return. If the loss is greater than other income on the tax return, it can be used against previous or future earnings. Because of this, a sole proprietorship is called a pass-through entity.Meaning the income passes through the business directly,and then to the individual taxpayer. The sole proprietor does not get a wage or salary. Any profit or loss the business makes is the sole proprietor's net income. Profit and Net are the same thing. Net gets taxed. The sole proprietor may end up with more or less money available than the amount shown as a profit or loss.
- Tax Advantages: Multiple Member Limited Liability Company (LLC)
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