Business Structure: Sole Proprietorship

Posted by The Feds on June 19, 2008

A sole proprietorship is the most common form of business organization. It’s easy to form and offers complete control to the owner. It is any unincorporated business owned entirely by one individual. The owner is also personally liable for all financial obligations and debts of the business.

Sole proprietors can operate any kind of business as long as you are the only owner. It must be a business, not an investment or hobby. It can be full-time or part-time work. This includes operating a:

  • Shop or retail trade business
  • Large company with employees
  • Home based business
  • One person consulting firm

Every sole proprietor is required to keep sufficient records to comply with federal tax requirements regarding business records.

Generally, sole proprietors file Schedule C or C-EZ, Profit or Loss from Business, with their Form 1040. Sole proprietor farmers file Schedule F, Profit or Loss from Farming. Your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return.

Sole proprietors must also pay self-employment tax on the net income reported on Schedule C or Schedule F. You may also be able to deduct one-half of SE tax on your 1040. Use Schedule SE, Self-Employment Tax, to compute SE tax.

Sole proprietors do not have taxes withheld from their business income so you will generally need to make quarterly estimated tax payments if you expect to make a profit. These estimated payments include both income tax and self-employment taxes for Social Security and Medicare.

June 19, 2008 | Filed Under Small Business 

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