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Chaya Kundra

Tax filings and liability of a sole proprietorship

| Feb 8, 2021 | back taxes or tax debt |

Owning your own business is a major accomplishment; however, it is a task that requires much planning and preparing for. Not only does a business owner in Washington, D.C. and elsewhere need to form the business and create a business plan so it operates properly, he or she needs to understand how owning a business could impact them on a personal level. In other words, how the owner could be personally liable for the business itself. For a sole proprietorship, this means combining business taxes with one’s personal taxes.

Sole proprietorship taxes

For many, establishing a sole proprietorship means more simplicity. It allows for one to not have the need to file separate taxes. This means that all business income as well as losses are reported on one’s personal tax return. While this makes things easier for the owner, it does open up the door to personal liability when it comes to legal judgments, taxes and debt.

Incorporating a business for tax reasons

Because the income of a sole proprietorship is taxed as personal income, the tax rate is dependent on an individual’s personal income racket. In contrast, a corporation typically has lower tax rates when compared to sole proprietorships. Additionally, corporations are taxed separately. Thus, it is often vital to consider how the business would be taxed in other business forms because this could reduce the amount of taxes paid.

However, if the business is small, a corporate tax return may be too complex and costly to outweigh the simplicity with the filing for a sole proprietorship, even if one would pay more in taxes. Thus, it is important to weigh these options prior to forming and during the operation of a sole proprietorship.

Running a business can get complex, especially when it comes to keeping finances in order and paying taxes and fees accordingly. Thus, it is important to take the time to understand one’s options when it comes to these issues. Moreover, a business owner should understand how they could be exposed to personal liability and how best to ameliorate any issues that may arise.