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Sole Proprietorship

A sole proprietor or solo for short is what the IRS calls any individual who owns and operates a business that isn't a formal entity like a partnership or corporation. From tax point of view the profits (or losses) from the operations of a Sole Proprietorships are reported on the individual's annual tax returns. Keep in mind that state or local governments might want you to get various business or occupational licenses and/or you might have to pay some taxes. Sole Proprietors are taxed on all the profits earned in the year whether they take the profits out of their business bank accounts or not.

Pros of a Sole Proprietorships

  • Tax rules are simple

  • Minimum setup cost

  • Easy to go in and out of business

  • Easy to change to another business entity

  • Easiest record keeping

Cons of a Sole Proprietorships

  • Unlimited personal liability for business debt

  • Need to pay self-employment essentially double as that paid by wage-earners

  • No co-owners allowed. However, filing a joint tax return with your spouse that includes the profits of your sole proprietorship will not convert it into a partnership

  • Company dies with the owner

  • Retirement options for a Sole Proprietorships

    • SEP-IRA : Allows up to 25% of net income to be contributed up to $56,000. They are easy to open best for one-person business with no employees. Owners must contribute for all employees, not just for themselves.

    • Solo 401(k) : Can contribute and deduct up to $56,000 (plus $6,000 if you are 50 or over). Good for business with good cash flow and employees. Costlier to set up and maintain than other plans. https://www.irs.gov/retirement-plans/401k-plans

    • SIMPLE IRA : Can contribute and deduct up to $13,000 (plus $3,000 if you are 50 or over). Very easy to set up and works with or without employees. Contribution limit may not result in a big enough payoff. https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan

    • Roth IRA : It is a non-deductible retirement plan. Can contribute up to $6,000 ($7,000 if you are 50 or over). No tax when contributions removed from the plan. Nondeductible and low contribution limit.

Frequently Asked Questions (FAQ)

  • Q. What is self employment tax?

    A. As a sole proprietor, you are generally liable for self-employment tax. If you earn or receive income during the year that is not subject to withholding, or if you do not have enough income tax withheld from other income such as wages, you may have to pay estimated tax.

  • Q. What tax form does a Sole Proprietorships need?

    A. Sole Proprietorships report income and expenses on Form 1040 Schedule C.

  • Q. What if a Sole Proprietorships loses money?

    A. IRS allows Sole Proprietorships to offset their net operating loss against their income like wages from a job or earnings from another business.

  • Q. Does Sole Proprietorships have to pay estimated taxes?

    A. Sole Proprietorships do not have the option to pay their taxes once a year. They need to pay IRS four times during the year they are called estimated taxes.

  • Q. What happens if the owner of a Sole Proprietorships dies?

    A. When a Sole Proprietorships owner dies, the IRS says the business dies as well. Sole Proprietorships assets become part of the owner estate.

  • Q. I work from home can I get any benefit?

    A. If you use part of your home for business, you may be able to deduct expenses for the business use of your home.

  • Q. Can I employ my spouse?

    A. Yes, if your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her.

  • Q. Can I have my spouse as a partner?

    A. Yes, The provision generally permits a qualified joint venture whose only members are a husband and wife filing a joint return not to be treated as a partnership for Federal tax purposes. A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.

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