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Tax Benefits For Sole Proprietorship

How Strong Is A Verbal Agreement In Court

Sole Proprietorship Taxes Explained – PRINCE DONNELL

Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.

If an oral contract is brought in front of a court of law, there is increased risk of one party lying about the initial terms of the agreement. This is problematic for the court, as there’s no unbiased way to conclude the case often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it’s not in writing.

That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they’re simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case – money is exchanged for goods.

Llc Vs Corporation Ownership

Corporations issue shares of stock to their owners, who are called shareholders. Corporate shares are easy to transfer from one owner to another, and therefore a corporation can be a good choice for a business that anticipates having outside investors or making a public stock offering.

The owners of an LLC are called members, and instead of shares, each member owns a designated percentage of the company, sometimes called a membership interest.

Membership in an LLC may be more difficult to transfer than shares in a corporation. An LLCs operating agreement will typically specify whether and how membership interests can be transferred.

In some states, if a member leaves an LLC and the operating agreement does not specify otherwise, the LLC must be dissolved.

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Internet And Phone Bills Deduction

Regardless of whether you claim the home office deduction, you can deduct the business portion of your phone, fax, and internet expenses. The key is to deduct only the expenses directly related to your business. For example, you could deduct the internet-related costs of running a website for your business.

If you have just one phone line, you shouldnt deduct your entire monthly bill, including personal and business use. According to the IRS, You cant deduct the cost of basic local telephone service for the first telephone line you have in your home, even if you have an office in your home. However, you can deduct 100% of the additional cost of long-distance business calls or the cost of a second phone line dedicated solely to your business.

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Advantages And Disadvantages Of A Sole Proprietorship

The main benefits of a sole proprietorship are the pass-through tax advantage mentioned before, the ease of creation, and the low fees of creation and maintenance.

With a sole proprietorship, you do not need to fill out a tremendous amount of paperwork, such as registering with your state. You may need to obtain a license or permit, depending on your state and type of business. But less paperwork allows you to get your business off the ground faster.

The tax process is simpler because you do not need to obtain an employer identification number from the IRS. You can obtain an EIN if you choose to but you can also use your own Social Security number to pay SSN taxes rather than needing an EIN.

In addition, because you are not required to register with your state, you do not need to pay any fees associated with renewing your registration or any other fees associated with the process. This saves you a lot of money, which is important when starting your own business.

With a sole proprietorship, you dont need a business checking account, as other business structures are required to have. You can simply conduct all your finances through your own personal checking account.

There are 32.5 million small businesses in the United States.

Thus, entrepreneurs begin as an entity with unlimited liability. As the business grows, they often transition to a limited liability entity, such as an LLC or LLP, or a corporation .

What Are The Benefits Of Sole Proprietorship


To incorporate or not to incorporate? If youâre on your way to starting a small business, that is the question.

Among the myriad business styles, it may seem like everything falls under âcorporation.â But the road to becoming an entity such as an S-Corp or C-Corp is often long and paved with paperwork. But why choose a sole proprietorship vs an LLC?

If youâre a small business owner running a small business, you may experience more control and convenience with a sole proprietorship. Itâs the most common form of business in the US for a reason, with millions of people benefitting from such a straightforward business model.

Want to learn more? Read on to discover the benefits of a sole proprietorship.

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Will The Advantages Of A Sole Proprietorship Work For You

Businesses without significant liability risks in their industry can function as a sole proprietorship without a big problem. For example, independent consultants, wedding planners, housekeepers, landscapers, freelance designers, computer consultants and online drop-ship retailers are excellent candidates to operate as a sole proprietorship. In contrast, businesses in the healthcare or food and hospitality industries have increased liability risks, making them poor candidates for the sole proprietorship structure.

The advantages of a sole proprietorship are great for small businesses, side projects and for when youre just starting your business. But it has real limitations that you need to consider.

Remember that just because your business begins as a sole proprietorship, it doesnt have to remain one. As you grow, you might want to transition to a different business structure that allows you to expand, evolve and adapt.

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Can A Sole Proprietorship Change To An Llc

It is possible for a sole proprietorship to change to an LLC . In order to do so, the owner must file articles of organization with the secretary of state in the state the business operates in. They must also refile your DBA to maintain the trade name and apply for a new EIN with the IRS. The owner should also contact the city or county and inform the proper officials that the business is now operating as an LLC.

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No Annual Reports Or Filings

Another strength of the sole proprietorship is that it can keep certain financial information private. Other business structures, like S-Corps, C-Corps and LLCs are registered with the state and are required to file annual reports with state agencies that are often made available to the public as part of the businesss official record.

In most states, sole proprietorships are not bound by these annual filing requirements.

When The Business Owner Dies The Sole Proprietorship Dies

What Is An LLC?

No matter how successful a sole proprietorship business may be, should the owner die or for some other reasons become unable to continue, the business ceases to be. Where partnerships, limited liability corporations, and corporations each have structures that allow a business to continue existing, a sole proprietorshipâs identity is directly tied to its owner.

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S Corp Vs Sole Proprietorship Tax

When it comes to tax returns, sole proprietors are required to declare all their business income as self-employment income. Moreover, the more income generated, the fewer business deductions will be subjected to both ordinary tax rates and self-employment taxes. Self-employment tax comes with a 10.4 percent Social Security tax and 2.9 percent Medicare tax applied to all self-employment income. On the other hand, ordinary income taxes can reach up to 35 percent.

Owners of business entities with a sole proprietorship status file taxes as individuals using the following documents:

  • Profit or Loss from Business

Difficult To Take On Additional Debt

Consider this scenario: Your business is growing steadily and things are going great. Theyre going so great that you just received the largest purchase order in your businesss history. Only theres a problem: You cant afford the materials to fulfill this order.

You can apply for a loan or other financing, but operating as a sole proprietorship means you cant secure a loan for the business as a separate entity. Lenders will scrutinize your personal credit score, debts and other financial obligations before approving your application.

If your personal financial situation doesnt meet the lenders standards, you might not be able to obtain financing.

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Fewer Fees: Sole Proprietorship Can Be Cost Effective

Generally, sole proprietorship involves fewer startup costs than forming an LLC or corporation.

In Wyoming, for example, there’s no formal process to start a sole proprietorship, while LLC formation generally costs around $100.

Along with startup costs, there are generally annual fees associated with legal entities. And additional tax expertise may be needed and come at an additional cost.

Although sole proprietorship allows owners to avoid administrative costs, they may need to consider public notice requirements applicable when a business has a name other than the owner. This could involve registering a DBA, or “Doing Business as” name, and come with a moderate fee.

Can You Have 2 Eins

What Does a Tax Examiner Do?

Yes, you can however, there are conditions.

You cannot have 2 EINs for one business entity, as the IRS only allows companies to have one tax ID number for filing taxes.

However, if you start multiple entities, you must get EINs for each because, as mentioned above, the IRS requires every business to have an individual tax number.

This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.

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Operating Freedom And Flexibility

As long as your business remains small, a sole proprietorship is the most flexible business form to change. You can make any change you want, including changing business policies and type of business, without much cost or process. Sole proprietorships also offer a higher degree of control and fast decision making opportunities. Unlike in partnerships or corporations, you dont need consent or approval from partners or officers to make any business decision.

Cases In Which A Sole Proprietorship Needs An Ein

Sole proprietor owners and their businesses are not separate taxable legal entities, so the IRS doesnt require them to have an EIN.

Instead, you can use your SSN to identify your business come tax time and report your income and expenses using Form 1040 Schedule C.

However, some cases require a sole proprietor to get an EIN, such as:

  • You hire one or more employees
  • File for bankruptcy
  • You incorporate
  • Take on partners/operate as a partnership
  • Buy or inherit an existing business you use as a sole proprietorship
  • Have a Keogh or Solo 401 retirement plan
  • File pension returns or specific excise tax
  • Make payments to non-U.S. residents and withhold taxes
  • Administer estates or trusts
  • Work with farmers cooperatives, nonprofits, or use administrators
  • When none of the above apply to your business, you dont need a sole proprietorship EIN.

    Okay, simple enough, but what about that LLC you want to start? Will you need a new EIN?

    Ill clarify next:

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    Advantages Of A Sole Proprietorship

  • Sole proprietorships are easy to establish and get started.
  • The owner retains complete control of the business.
  • There are no corporate income tax payments.
  • They are less expensive than other business types.
  • A sole proprietorship is the simplest of all the structures for a single-owner business. Your business is automatically considered a sole proprietorship without having to incorporate your business. However, you must apply for any licenses or permits that your state requires for your profession.

    As the owner, you are responsible for all business debts, losses, and liabilities, but are also entitled to all the business profits, too. Other advantages include:

  • Ease. Because there is no formal action required to form a sole proprietorship, owners can save money and time that would otherwise be spent fulfilling paperwork requirements.
  • Complete control. As the sole proprietor, the owner can make all the decisions about the business without partners or shareholders to consult.
  • No corporate tax payments. Instead of completing corporate income like a large corporation would, sole proprietorships require the owner to pay only personal income taxes. You simply have to attach a Schedule C to your 1040 form.
  • Tax Benefits Of A Sole Proprietorship

    Sole Proprietorship Taxes Explained – Sherman the CPA

    Are you wondering if there are tax benefits to a sole proprietorship? There are a few, which are listed here:

    1 Marginal tax rates: Your sole proprietorship income is taxed at individual income tax rates, which could be lower than corporation taxes.

    2 Avoid double taxation: As a sole proprietorship owner you avoid double taxation.

    3 Straightforward tax preparation: Without as many complex schedules and small business tax forms than other business types, tax reporting requirements are said to be easier than other business entities.

    On the downside, sole proprietorships are taxed on 100% of their business profits.

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    When Must I Deposit The Contributions I Make For Myself To My Simple Ira

    You must deposit your salary reduction contributions within 30 days after the end of the tax year. For most people, this means salary reduction contributions for a year must be made by January 30 of the following year.

    You must deposit your employer contributions by the due date of your federal income tax return for the tax year that includes the last day of the calendar year for which you made the contributions. For most people, this means employer contributions for a year must be made by April 15 of the following year, or by October 15 if on extension.

    Sole Proprietorship Taxes: Special Deductions

    On the other hand, although there is some cash activity in your business that does not impact the taxable income for your sole proprietorship, there is also some non-cash activity that can reduce your taxable income but these activities might not appear on your profit and loss statement.

    When it comes to your sole proprietorship taxes, therefore, youll want to keep these special and sometimes overlooked business tax deductions in mind, as they can make a huge impact on your tax liability.

    » MORE:Small-business tax deductions you need to know

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    What Is A Joint Venture

    A joint venture is also an agreement for two parties to be in business together however, the scope of the venture agreement is generally limited to a project rather than an entire business. For this reason, the venturers typically handle things like bank accounts, payroll accounts, GST/HST, and the like because the venture is not a business , but rather an agreement to work on a project together.

    Do Sole Proprietors Pay More In Income Taxes Than Partnerships Or Limited Liability Companies

    Hidden Tax Benefits of Sole Proprietorship

    Sole proprietorships, partnerships, and LLCs pay income taxes in the same way as pass-through entities, so paying more or less tax depends on the individual owners tax situation. The total tax paid by all these business owners is based on their total income from all sources, not their business incomes alone.

    A partnership doesnt pay taxes, but it files an information return with the IRS. The partners receive a Schedule K-1 showing their share of the partnership income.

    Single-member LLCs generally pay income taxes as sole proprietorships, and multiple-member LLCs generally pay taxes as partnerships.

    Read Also: Benefits Of Llc Taxed As S Corp

    You Have Freedom And Flexibility

    Freedom and flexibility of running your business as a sole proprietorship are included in this business structure. The process of registering as a corporation is longer and costlier, and business operations as an incorporated business are also more complicated.

    As a sole proprietor, you arent restricted to complicated and strict regulations. This is particularly attractive to small proprietors who dont have the labour to continually ensure these strict guidelines are adhered to and carry them out. Sole proprietors also have all the decision-making freedom.

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    Operating Under An Assumed Name

    If your sole proprietorship business will be operating under a name other than the owner’s name, most localities will require you to register a DBA name. By filing a DBA, you inform the local government and the public that the business is operating under an assumed name and indicates who owns the business.

    Choosing between your own name and a fictitious name can be a difficult decision. If you’re reasonably well-known and well-respected in your community or in your business field, using your own name can be a great marketing tool.

    However, there’s a risk with using your own name. If your business fails or gets into financial or legal trouble, it’ll have your name on it. If you try to start another business, people may associate your name with earlier troubles.

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    Establish A Business Name

    If you plan on running your business under your legal name, you donât need to do anything extra.

    If you choose to operate under a trade name, you must ensure the name you choose isnât too similar to another registered business or trademark. Do some careful research in the following government databases:

    • California Secretary of State
    • U.S. Patent & Trademark Office
    • The County Recorderâs Office

    Once youâve chosen a name, file a Fictitious Business Name Statement in your areaâs county recorder office. This costs a mere $26 and should be followed up with a published statement of the businessâ opening in a well-known newspaper in the county.

    What Are The Disadvantages Of Sole Proprietorship

    LLC vs Sole Proprietor: Which is best for YOUR business?

    All things considered, the advantages of sole proprietorship are pretty compelling. However, there are other business entity types for a reason a sole proprietorship won’t be right for everyone or every business.

    Theyre easy to set up, but that convenience comes at the expense of certain protections that youd otherwise get through an LLC or incorporated business entity. So, depending on the specifics of your business, you may find that a sole proprietorship doesnt give you the full range of protections that you need and that the disadvantages outweigh the benefits.

    Here are some of the top disadvantages of sole proprietorship to consider:

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