Overview of Sole Proprietorship
A sole proprietorship has one owner. To operate under a name different than the owner’s, sole proprietorships need to file a DBA (Doing Business As). Filing a DBA allows sole proprietorships to market under a specific business name rather than the owner’s. This can help convey business values. A DBA does not change the legal structure but can provide marketing advantages.
Sole proprietors must register the DBA name with local government before using it. This identifies the responsible party if company issues arise. Owners file tax returns under their personal name but list the DBA on accompanying forms.
The advantages of a sole proprietorship include ease of formation and the owner retaining sole profit control. The main disadvantage is unlimited personal liability for all losses and liabilities. Profits are taxed through the owner’s income tax return.
How Sole Proprietors Pay Themselves
Sole proprietors need to pay taxes. Profits are taxed through the owner’s income tax return. After deducting business expenses, the remaining profit is personal income. Anything you earn beyond $400 is taxable small business income. If you’re self-employed, you must file a tax return and pay tax like any employed wage earner.
The best way to pay tax is to estimate taxable income and file taxes quarterly. You can deduct most expenses by filing Schedule C and Form 1040. Refunds happen when estimated payments exceed liability based on profit and loss. Must contribute to Social Security and Medicare, called "self-employment taxes." You can deduct home office and business travel.
Taxation Considerations for Sole Proprietors
Sole proprietors can deduct business losses and reduce taxable income. In some cases, deduct health care reimbursements. Common deductions include equipment, utilities, subscriptions, travel, and assets. Treat all startup costs as capital expenses. While you can deduct some interest and taxes, they cannot be deducted as startup costs. Tax rate is based on bracket from combined income. Sole proprietors pay estimated quarterly taxes. Can save by converting to LLC and using deductions.