A sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence apart from you, the owner. Its liabilities are your personal liabilities. You undertake the risks of the business for all assets owned, whether used in the business or personally owned. You include the income and expenses of the business on your own tax return.
Sole proprietorship means that one person independently owns and operates an unincorporated business for profit. The business is considered an extension of the owner rather than as a separate legal entity. For tax purposes, the business profit or loss is combined with other owner income sources.
Advantages:
- Simplest form of ownership to establish and operate
- One owner
- Owner has complete control over management decisions and policies
- Use of all profits at the discretion of the owner
- Limited paperwork to state and federal agencies
- All losses are incurred by the owner (owner’s income directly linked to success/failure of business)
Disadvantages
- All management decisions—staffing, policies, problems—must be handled by owner
- Owner personally liable for all debts, taxes, and claims incurred by the business
- May be difficult to raise capital (i.e., will depend on owner’s credit history)
- Continuity of business disrupted by owner death or disability
- Combined with other income sources, profits taxed at owner’s individual tax rate
If you are a sole proprietor use the information in the chart below to help you determine some of the forms that you may be required to file.
| If you are a sole proprietor then you may be liable for… | Use Form… |
| Income Tax | 1040 and Schedule C or C-EZ ( Schedule F for farm business) |
| Self-employment tax | 1040 and Schedule SE |
| Estimated tax | 1040-ES |
Employment taxes:
|
941 ( 943 for farm employees)940 or 940-EZ 8109 |
| Excise Taxes | Refer to the Excise Tax web page |
