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What is a Sole Proprietorship?

The sole proprietorship is the most common form of business structure.

  • A sole proprietorship is a business controlled and owned by one individual and is limited to the life of its owner, so when the owner dies the business ends.
  • The owner receives the profits and takes the losses from the business.
  • This individual alone is responsible for the debts and obligations of the business.
  • Income and expenses of the business are reported on the proprietor's individual income tax return and profits are taxed at the proprietor's individual income tax rate.
  • Kansas has no state requirements to register or file the business name of a sole proprietorship.
  • Advantages

    • A sole proprietorship has few formalities and low organizational costs.
    • Decisions are made by the owner.
    • There are fewer reporting requirements to government agencies.
    • Corporate "double tax" is avoided.
    • Business losses may be taken as a personal income tax deduction to offset income from other sources.
    • All profits are taxed as income to the owner at the owner's personal income tax rate.
    • Ability to do business in almost any state without elaborate formalities.
  • Disadvantages

    • Compared to corporations and partnerships, sole proprietorships cannot take advantage of certain benefits afforded by the Internal Revenue Code.
    • The business terminates upon death of the owner.
    • Investment capital is limited to that of the owner.
    • Loans are based on credit worthiness of the owner.
    • Owner's assets are subject to business liabilities. So for example, if a company truck is involved in an accident, the owner's personal assets (that is, bank accounts, cars, etc.) may be attached to compensate the injured party in some judicial proceeding or lawsuit.

    A self-employed person, who does not expect to have employees, is not required to apply for a Federal Employer's Identification Number through the IRS. Form 1040 (Schedule C) must be filed with the federal government and a Kansas Tax Return with the Kansas Department of Revenue, on or before the 15th day of the fourth month following the close of the taxable year.

    Note: Sole Proprietors and Partnerships are required to make estimated income tax payments if their estimated Kansas income tax, after all credits, is $200 or more. Non-residents should consider only income from Kansas sources for meeting these conditions.

  • Tax Implications

    • Profits are taxed as personal income on IRS Form 1040, Schedule C; and
    • For information on Social Security tax, refer to IRS Publication 533, and use Form 1040, Schedule SE.
  • Other Helpful Publications

    • For estimated tax payments, refer to IRS Publication 505; and
    • To order Publication 583, Starting a Business & Keeping Records, contact the IRS at (800) 829-3676.
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