Sole Proprietorship

The most common and basic business entity is a Sole Proprietorship. It refers to a single owner with no liability protection of personal assets. If there are no employees, Sole Props can operate under the owner's social security number.  

Tax-wise, sole props are filed on a Schedule C with the individual’s personal return on the federal tax Form 1040.  There may be other accompanying schedules depending on the type of business. The Sole Proprietor takes draws against earnings but pays tax on the total net profit of the business, including Self-Employment tax (Social Security and Medicare). The Sole Proprietor is allowed to subtract one-half of the Self-Employment tax from total personal income before figuring his or her income tax liability.  Link to our page of  Tax Tips for Sole Proprietors  for additional information.

Spouses who jointly run a business may both be considered owners for tax purposes beginning with the 2007 tax year.  Each would file a Schedule C and Self-employment Tax schedule.  Income and expenses of the business would be split between the husband and wife based on work interests.  To choose this option, both spouses must materially participate in the business, they must be legally married and eligible to file a joint tax return.