Taxation of Sole Proprietorships

The IRS does not distinguish the owner of the sole proprietorship from the business entity, meaning that they are taxed as one and the same. This is often called pass through taxation, since the sole proprietorship taxes’pass through’ to the owner. This makes taxation of a sole proprietorship a simple process because, as the owner, you can include business profits on your usual 1040 form.

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What Steps Do I Need to Take to Set-Up a Sole Proprietorship?

A sole proprietorship is one of the easiest types of business entities to set up. For this reason alone, a sole proprietorship is often an attractive option to a small business owner. In fact, you may already be operating as a sole proprietor just by conducting business on your own. Depending on your local laws, you may not even be required to register your business. However, while registration may be unnecessary, it is a great way to protect your business. In addition to registering your business as a sole proprietorship, there are several other steps you should take along the way to ensure that you protect both your business, as well as your personal assets.

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Benefits of Operating as a Sole Proprietorship

Forming a sole proprietorship can be a great way for a single business owner to get a business up and running. Because a sole proprietorship is fairly unstructured, it will allow you to concentrate on building your business, and worry less about the business formalities required to form a corporation or a limited liability company (“LLC”). However, while there are pros to forming a sole proprietorship, there are cons as well.

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What is a Sole Proprietorship?

A sole proprietorship is you doing business as yourself, even if you use a fictions name. It is simple, but affords no asset protection. Anything you do in business as a sole proprietorship — or an employee of yours does — is your personal liability and this exposes your assets to liability.

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