CFP

Characteristics and Income Taxation of Business Entities - Sole Proprietorship

Sole Proprietorship
If the taxpayer is a sole business owner or professional in their own practice, they are usually practicing as a sole proprietor. In this type of entity, you report business profit or loss on your personal tax return.

Pertinent data on Sole Proprietorships:
Liability: Unlimited
Nature of Owner's Income: Self-employment income

Federal Tax Filing Forms Used
Income Tax: Form 1040, Schedule C
Self-employment tax: Form 1040, Schedule SE
Estimated tax: 1040-ES
Employment taxes: 941 (943 for farmers), 940 or 940-EZ, and 8109.
Additional forms for excise taxes.
Compensation reported: Form 1040, Schedule C

Advantages:
Low cost to establish & run
Pension plan contributions before-tax (not included as income to owner)
Up to 70% of medical insurance deductible for owners

Disadvantages:
Limited human resources
Lack of continuation at owner's death
Unlimited liability from creditors and lawsuits
Self-employment taxes




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