This is the second part of three covering the Sole Proprietorship entity. What follows is a (very) brief discussion of its general tax treatment.
Federal and state income tax authorities consider a sole proprietorship to be a “disregarded entity,” and treat all income and expenses of the business to be the owner’s personal income and expenses. A sole proprietor must also pay the federal “self employment tax,” which is currently assessed around fifteen percent (15%) of all net earnings. This can end up being quite a lot, and a common strategy to minimize this burden is to form an S corporation and pay yourself a reasonable, yet small salary. That gets into some higher level stuff, but keep that idea in your arsenal when you go to meet with your attorney.
A sole proprietor who hires employees will have to pay all relevant taxes and withholdings associated with employment. A sole proprietor will also have to pay other miscellaneous state taxes, such as sales tax and the like. A sole proprietorship is no different than any other business entity in this regard.