Paying Taxes on Business and Personal Income

In the eyes of the law, a sole proprietorship or Asset is not legally separate from the person who owns it. The fact that a sole proprietorship and its owner are one and the same means that a sole proprietor simply reports all business income or losses on the individual income tax return - IRS Form 1040 with Schedule C attached.

A sole proprietor will have to take personal (not corporate) responsibility for withholding and paying all income taxes, which an employer should do. This means paying a “self-employment” tax (over 15% on the first $95,000), which consists of contributions to Social Security and Medicare, and making advance payments of estimated taxes throughout the year.

Before Sub S elections (for the sole proprietor) and LLC passive income (for investors) there was the disadvantage of double taxation and no loss pass through to shelter income if you incorporated.  Those issues have been greatly mitigated when properly incorporated plus the added benefit of superior protection.

In summary , when all things are considered the Sole Proprietorship and Personal Ownership may be the easiest but not the wisest form of business and asset ownership.

By contrast, the law provides owners of corporations and limited liability companies (LLCs) with “limited personal liability” for obligations and more favorable tax advantages.

This means that, unlike sole proprietors and general partners, owners of corporations and LLCs can normally keep their house, investments and other personal property even if their business fails  or there is a personal judgment, if set up correctly.

The Sole Proprietor does not have access to many favorable tax treatments. Such as having employment taxes reduced (up to 50% in many cases with Sub "S"), not making estimated advance tax payments, pre-tax health insurance payments or being able to take more favorable corporate write offs before the income is considered a personal obligation, as well as many other benefits.

In addition, there are legal tax reduction strategies that can assist the owners is keeping more of what the company or asset earns as well as mitigate a good portion of the self employment or withholding tax.

A corporation or an LLC is the tax smart, protective option for any business endeavor or asset protection. A word of Caution; forming a Legal entity after the occurrence of a problem will not typically relieve the sole proprietor (and others) of personal responsibility.

The corporation or LLC needs to be formed and running the business prior to the occurrence of a negative or taxable event.

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