1. What is a Sole Proprietorship?
2. Sole Proprietorship: Liability Concern
3. Sole Proprietorship: Tax Concerns
4. What is an S Corporation?

An S corp sole proprietorship refers to a type of enterprise that is both run and owned by one person. When it comes to a sole proprietorship, there is legally no distinction between the owner and the business.

What is a Sole Proprietorship?

One major reason sole proprietorships tend to be so popular is that they are the cheapest and simplest way to form a business with just one owner.

To form a sole proprietorship, it is not necessary to file any papers or take any special steps besides the usual permit, license, and other regulatory requirements imposed on businesses by your state and locality.

Sole proprietorships don't require corporate charters, incorporations">articles of organization, bylaws, or shareholder meetings. Besides the personal tax return of the owner, no annual filing is required.

If you form a business on your own, don't form an LLC, and don't go through the process of incorporation, you will be considered a sole proprietor. Keep in mind that a sole proprietorship is not considered a separate entity in the eyes of the law.

The proprietor, or the business owner, owns all of the business's assets. The proprietor is the sole person in charge of the business's operation.

Sole Proprietorship: Liability Concern

The main risk of a sole proprietorship is that there is no legal separation between the business and its owner. In the event that your business faces a lawsuit and loses, you will be held responsible.

Sole Proprietorship: Tax Concerns

The Internal Revenue Service (IRS) considers a sole proprietorship a "disregarded entity," meaning you and your business are considered one and the same when it comes to taxation.

Sole proprietorships don't file tax returns, nor do they pay taxes. Instead, you need to report the losses you incur and income you earn on the IRS Form 1040, which is the personal tax return.

If the business is profitable, the money is added to your total income. For example, if you're married and you file a joint tax return with your spouse, the profit from the business will be added to your spouse's income. The total will be taxed.

Some sole proprietors are eligible for a 20-percent income tax deduction as entities that are pass-through, avoiding double taxation. The Tax Cuts and Jobs Act establishes this tax deduction that enables small business owners to pay taxes on profits at personal tax rates.

The sole proprietor is not viewed as an employee of the business entity. Rather, the sole proprietor is viewed as a business owner. Therefore, the sole proprietor is considered self-employed.

Your business is responsible for payroll taxes on its income. It is also not necessary for the business to withhold income tax from the pay you receive. The business doesn't need to pay federal or state federal unemployment taxes or file employment tax returns. You do not need to have workers' compensation insurance. All of this can help sole proprietors save hundreds, if not thousands, of dollars per year.

However, you will need to pay the following self-employment taxes:

  • Social Security
  • Medicare taxes

The IRS will view your business income as self-employment income. The self-employment tax is a 12.4-percent Social Security tax as well as a 2.9-percent Medicare tax on the income. Self-employment tax is equivalent to the total Medicare and Social Security tax paid for by an employee.

What is an S Corporation?

After you form a corporation in a state, you can decide to have the corporation taxed as an S corporation by filing the IRS Form 2253 with the IRS. An S corporation, also referred to as a Subchapter corporation, is formed by filing the articles of incorporation with the secretary of state.

If a venture may be sold one day, it is best to incorporate the venture and elect it to be taxed as an S corporation. A sole proprietorship can be legally considered a corporation. If you incorporate your sole proprietorship as an S corporation, you will be viewed as the sole shareholder as well as the director and president.

By establishing an S corporation, you can avoid paying both corporate and personal taxes.

If you need help with S corp sole proprietorship, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.