Advantages of a Sole Proprietorship

Easy to Start

There is no formal proce `ure required to form a sole proprietorship. Just hang out your shingle and you're in business.

In contrast, to set up a corporation certain state mandated procedures must be complied with.

Control and Flexibility

In a sole proprietorship, you're the boss! You have complete control and the flexibility to make decisions and act on them when you want. There is no one to vote you down or slow you down.

Business Losses are Deductible on Your Personal Income Tax Return

As a sole proprietor you can deduct a business loss from your other income. For example, say you earned $15,000 in wages from a part-time job and your spouse earned $25,000 in wages, for a total of $40,000.

If you have a business loss of $10,000 you can deduct it from the $40,000, reducing your income to $30,000. If your tax bracket is 20%, that's a $2,000 tax savings (20% x $10,000).

This could be a real tax saver, especially for new businesses during the first year or two of operation when losses are common.

You Can Convert Nondeductible Personal Expenses to Tax Deductions

Owning your own business lets you convert nondeductible personal expenses to deductible business expenses.

For example:

  • Car loan interest: If you use your car for business purposes you can deduct car loan interest on the business use portion of your car.
    • Here's how it works:
      • If your car loan interest is $1,500 and you use your car 80% for business, you can deduct $1,200 (80% x $1,500) as interest expense from your business income.
      • The remaining $300 is considered a personal expense and is not deductible.
      • Keep in mind, your car loan interest is in addition to your regular car expense deduction figured under the actual expense method or the standard mileage allowance method.
        • For example, if you figured your car expenses to be $5,000 under the mileage allowance method and your deductible interest on your car loan was $1,200, your total deduction would be $6,200 which you report on Schedule C (or F for farmers).
  • Home office deduction:
    • If you use a portion of your residence (owned or rented) regularly and exclusively for business purposes, you may deduct certain household expenses based on the portion of space allocated to your business use.
    • For example, if the space used for business represents 20% of the total square feet of your residence, you can deduct 20% of the cost for such things as home insurance, water, electric, garbage disposal, and, depreciation (if you own your home, not if you rent).

No Double Taxation

Self-employment income is taxed only once, at individual income tax rates. In contrast, income of a corporation is subject to tax twice:

  • First, at the corporate level:
    • Corporate income is taxed at corporate income tax rates.
  • Next, at the individual level:
    • When previously taxed corporate income is distributed to shareholders as a dividend, it must be included in each shareholder's personal income tax return where it is subjected to income tax again, at individual income tax rates.

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