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Sole Proprietorships

Sole proprietorships is the simplest form of business entity. You operate it as an individual. You report your gross income, expenses, and net income or loss on Schedule C of your income tax form 1040. The net income or loss is then reported on the first page on your Form 1040 on Line 12.

• What are the tax advantages of a sole proprietorship?

• What are the tax disadvantages of a sole proprietorship?

What are the tax advantages of a sole proprietorships?

Simplicity. No special forms need to be filed to start or to liquidate the entity. Instead of a whole tax form to file, there is just a Schedule C. There is no tax on liquidation unless assets are sold.

Profits and losses are taken directly by the owner. There is no limit on the deductibility of losses.

What are the tax disadvantages of a sole proprietorship?

Only one owner can be involved in the business. If two or more people want to operate a business, a different type of entity will be needed.

Changes in the business can be more difficult. Sale of the business to another person or entity is more complicated than the sale of stock in a corporation and can result in at least some ordinary income (sale of stock normally results in capital gain taxes, which are usually lower). Also, mergers with and acquisitions of other businesses are more difficult. If you have questions about sole proprietorships, contact a small business lawyer near you.