Sole Proprietors

By Bob Poeschl, EA

IN THIS SERIES OF ARTICLES WE WILL LOOK AT THE FOLLOWING ENTITIES THAT THE IRS RECOGNIZES FOR TAX PURPOSES.

SOLE PROPRIETORS
SINGLE MEMBER LLC’S
PARTNERSHIPS
MULTIPLE INDIVIDUAL LLC’S
CORPORATIONS “C” AND “S” TYPE
TRUSTS
ESTATES

DEFINITION OF A SOLE PROPRIETOR

1. AN INDIVIDUAL OPERATING A BUSINESS. THIS COULD INCLUDE A HUSBAND AND WIFE. MARRIED COUPLES ARE NOT CONSIDERED PARTNERS AND ARE NOT TREATED AS PARTNERS UNLESS THEY ARE NOT IN A COMMUNITY PROPERTY STATE AND/OR THEY FILE MARRIED FILING SEPARATE RETURNS.
2. SOLE PROPRIETORSHIPS DO NOT EXIST SEPARATELY FROM THE OWNER
3. THE INDIVIDUAL (OR MARRIED COUPLE) ACCEPTS THE FINANCIAL RISKS OF THE BUSINESS TO THE EXTENT OF ALL HIS/HER ASSETS WHETHER USED IN THE BUSINESS OR USED PERSONALLY.

AN INDIVIDUAL WHO PAYS WAGES TO A HOUSEHOLD (DOMESTIC) EMPLOYEE MUST REQUEST AN EIN NUMBER TO REPORT THOSE WAGES AND PAY EMPLOYMENT TAX BUT IS NOT A SOLE PROPRIETOR FOR TAX PURPOSES AND MUST FOLLOW SPECIAL RULES FOR REPORTING THE EMPLOYMENT ON HIS/HER 1040 FILING AT YEAR END

REPORTING / TAX FILING

1. BUSINESS PROFIT AND LOSSES ARE REPORTED ON FORM 1040-SCHEDULE “C”
2. PROPER EMPLOYMENT TAX RETURNS WHERE EMPLOYEES EXIST
3. THE OPERATOR IS NOT AN EMPLOYEE. THE OWNER PAYS TAXES ON THE NET PROFIT OF THE BUSINESS WHICH IS
a) GROSS INCOME LESS
b) COST OF SALES LESS
c) G&A EXPENSE

IDENTIFICATION NUMBERS

1. WITH EMPLOYEES. AN EIN NUMBER IS REQUIRED FOR EMPLOYMENT TAX FILINGS ONLY. THE FORM 1040 –SCHEDULE “C” IF FILED USING THE INDIVIDUAL’S SOCIAL SECURITY NUMBER ALTHOUGH THE EIN NUMBER IS LISTED ON THIS FORM.
2. WITHOUT EMPLOYEES. NO SEPARATE NUMBER OR REQUIREMENTS ARE NECESSARY THE TAX PAYER SIMPLY USES HIS/HER SOCIAL SECURITY NUMBER.

OTHER THAN A NEW BUSINESS STARTING UP A NEW EIN NUMBER IS REQUIRED WHEN

1. A SOLE PROPRIETOR WITH EMPLOYEES FILES BANKRUPTCY UNDER CHAPTER 7 OR 11
2. THE BUSINESS IS INCORPORATED
3. PARTNERS ARE ADDED TO THE BUSINESS AND A PARTNERSHIP IS FORMED
4. THE BUSINESS IS PURCHASED OR INHERITED BY THE TAX PAYER AND/OR SPOUSE

NO NEW EIN NUMBER IS REQUIRED WHEN

1. THE NAME OF THE SOLE PROPRIETORS BUSINESS IS CHANGED. A SOLE PROPRIETOR’S BUSINESS NAME IS ALWAYS THE SAME AS THE PERSONS NAME, THE NAME OF THE BUSINESS IS ALWAYS A DBA OF THE INDIVIDUAL
2. LOCATION IS CHANGED, NEW ADDRESS ETC.
3. MULTIPLE LOCATIONS ARE ADDED TO THE BUSINESS.

THE EIN NUMBER IS NOT TRANSFERABLE TO OTHERS INCLUDING THE SALE OF THE BUSINESS. WHEN A SOLE PROPRIETOR SELLS THE BUSINESS IT IS ALWAYS CONSIDERED A BULK TRANSFER OF ASSETS AND LIABILITIES.

ANYONE CAN BE A SOLE PROPRIETOR AND IS THE SIMPLEST FORM OF DOING BUSINESS. THE ONLY LEGAL REQUIREMENTS TO BE A SOLE PROPRIETOR ARE

1. FOLLOW STATE AND LOCAL BUSINESS LICENSE AND TAX REQUIREMENTS
2. IF EMPLOYEES ARE PRESENT OBTAIN A EIN NUMBER
3. KEEP RECORDS THAT ACCURATELY REFLECT INCOME AND EXPENSE. THERE ARE NO FORMAL REQUIREMENTS AS TO THE FORM OF THESE RECORDS.

THERE IS ANOTHER TYPE OF SOLE PROPRIETOR. THIS IS THE SINGLE MEMBER LLC. THIS TYPE OF ENTITY FOR TAX PURPOSES CAN REPORT AND OPERATE THE SAME AS A SOLE PROPRIETOR EXCEPT

1. THE OWNER CAN BE AN EMPLOYEE OF THE ENTITY
2. THE OWNER OPERATES UNDER THE PROTECTION OF THE CORPORATE VEIL.
3. AN ELECTION MUST BE MADE ON FORM #8832 FOR AN LLC TO BE TREATED AS A CORPORATION FOR TAX FILING PURPOSES.

THE JURY IS OUT ON MANY OF THE QUESTIONS RELATING TO THE ACTUAL PROTECTION A SOLE PROPRIETOR RECEIVES FOR TAX PAYMENT PROTECTION, TREATMENT FOR PAYROLL TAX PURPOSES AND RECORD KEEPING REQUIREMENTS.

THERE ARE FIVE TYPES OF BUSINESSES

1. INVENTORY
2. SERVICE/CONTRACTOR
3. MANUFACTURING
4. FARMING
5. FISHING

ALL OF THESE HAVE TO BE OPERATED AS SEPARATE ENTITIES AND CAN NOT BE COMBINED ON A SINGLE FORM 1040-SCHEDULE “C”