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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.
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