Business Entities According to the IRS: Sole Proprietorships

Over the next couple of weeks, this blog will focus on business entities that are recognized by the IRS. Today, we will focus on a sole proprietorship. We’ll discuss what it is, what the tax rate is, and who benefits the most from filing as a sole proprietorship.

A sole proprietor is someone who owns an unincorporated business by himself or herself. You may be a sole proprietor without even knowing it. For example, if you are a freelance worker, you are technically a sole proprietor.

If you are operating under a name that is different from your own, then it would be wise to file what’s known as a DBA (“doing business as”) with your respective Secretary of State. Because you and your business are the same in the eyes of the government, the business itself is not taxed separately and the sole proprietor’s income is the same as individual income. In 2020, a sole proprietor should expect a self-employment tax rate of 15.3% on the first $137,000 worth of net income plus 2.9% on net income over $137,700.

The advantages of a sole proprietorship are that they are simple to form, an individual has complete control over the business, and the tax return is easy since the business and individual recognize the same income. However, the largest disadvantage is that there is an unlimited personal liability to the owner because there are no separations between the business and the owner. This includes any liabilities that an owner may incur to an employee’s actions!

If you have any other questions about whether filing as a sole proprietor is right for you, the professionals at The Center for Financial, Legal and Tax Planning are more than well-equipped to answer your questions. Please contact us at (618) 997-3436.