Before starting a business, it is worthwhile to consult a tax accountant or business attorney. If you are unsure of the best type of legal structure for your business, you may need a professional to help you determine the most advantageous way to set up your business.
Every type of business structure offers specific tax advantages and disadvantages. Here are some of the tax and financial benefits to establishing your business as a sole proprietorship:
- Easier Tax Returns to File: Tax returns for sole proprietorships are the simplest to prepare, are filed on the sole proprietor’s (business owner’s) tax returns. If you can prepare your personal tax returns, chances are pretty good you can easily prepare your own business taxes for a sole proprietorship.
Filing tax returns on sole proprietorships involves preparing a simple, one- to tow-page IRS form; the Schedule C. In most cases, you do not even have to provide lengthy data and the income and expenses you list on a Schedule C are fairly crude.
- Free From Mandatory Outside Audits: If you do not have to pay someone to do your business taxes for you, the savings could easily amount to several hundred dollars. You will also not have to pay for an independent audit, which can run into the thousands of dollars.
- No Tax Penalties for Dissolving the Business: If you wish to dissolve the company, there are no special requirements to do so. In other types of business structures, there are legal requirements that govern how you close out a business. Some of these requirements can have tax implications that are not imposed on sole proprietorships.
- You Can Steer Money to Drive Your Own Deductions: As a sole proprietor you own and manage your business. This means you determine spending, borrowing, and reap all the profits yourself (unless you have investors).
You can hire and fire and determine salaries of employees. Having this freedom to make decisions indirectly affects your taxes because you can make any adjustments in cash flow and payroll needed to keep your business finances in check. For example, if your profits are high and you need more tax write-offs, you alone get to decide how to off-set your income.
- Big Tax Savings on Healthcare Reimbursement Arrangements: Savvy sole proprietors can also use Healthcare Reimbursement Arrangements (HRAs) to get access to healthcare with the added benefits of double tax deductions.
- Boss Your Kids Around and Get Tax Deductions For It! Sole proprietors can hire their own minor children and not pay any payroll taxes until they turn 18. There are some restrictions, but they are few. Other employees typically trigger payroll taxes of at least 7.65% of wages paid.
No matter what type of business structure you form you will have to report your salary, profits and losses, and other financial information on tax returns. An advantage to forming a sole proprietorship is that although your business income counts as your personnel income, any losses your business takes may also be deductible for you. Business deductions for a sole proprietorship generally can reduce your personal taxes as well.
Related Articles:
- Tax Benefits to Sole Proprietors for Healthcare Reimbursement Arrangements : Learn how HRA plans can help you with medical and dental expenses – and receive the added benefit of double tax deductions for the same expenses.
- How Women Can Start a Small Business Sole Proprietorship: How to start a sole proprietorship. How to register your business name, get and EIN, and license your business, and certification for women-owned small businesses.
- United States Sole Proprietorships 101: Information about how to start a small business sole proprietorship. Learn the basics, pros and cons, and legal requirements of forming small businesses as a sole proprietorships.
