Tax Advantages of a Sole Proprietorship

by Christopher Carter; Updated September 26, 2017
Businesswoman

Sole proprietorships operate with a single owner, and they appear as an unincorporated business. Sole proprietorships lack the paperwork and filing fees required by LLCs and corporations. Furthermore, sole proprietors have full control over company assets, while being responsible for all business decisions. In this manner, decision-making occurs much faster in a sole proprietorship when compared to other business entities with multiple shareholders, partners or members.

Double Taxation

Avoiding double taxation provides an incentive for business owners to operate as a sole proprietorship. Corporations pay taxes on the profits of the corporation on a business level. When the corporation issues dividends to shareholders, those dividends are taxed on a shareholder's individual tax return. Sole proprietorships don't file taxes on the business level. Rather, sole proprietors claim business profits and losses on an individual or joint tax return. As explained on Toolkit.com, sole proprietors use Internal Revenue Service (IRS) Schedule C or Schedule C-EZ to reflect the income and expenses of their businesses. The Schedule C must accompany the sole proprietor's individual or joint tax return.

Business Losses

According to the Poznak Law Firm website, sole proprietors can deduct business losses up to the total amount of income earned by the business. Income sources include the sale of non-business property, dividends, interest and operational income. Operating as a sole proprietorship may lessen a family's overall tax obligation. For example, a married sole proprietor's business losses may be used to offset the income of her spouse.

Hiring

Parents who are sole proprietors may enjoy a tax benefit by putting their children to work for them. Children must be of legal working age. As explained on businessknowhow.com, hiring employees triggers a payroll tax of 7.65 percent or higher. Sole proprietors don't have to pay payroll taxes when hiring their minor children. According to businessknowhow.com, if the child earns less than $5,000 in a year, the income won't be subject to federal income taxes. In this scenario, the child pays no income tax and the sole proprietor avoids paying employment taxes.

About the Author

Christopher Carter loves writing business, health and sports articles. He enjoys finding ways to communicate important information in a meaningful way to others. Carter earned his Bachelor of Science in accounting from Eastern Illinois University.

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