Why You Should Not Be A Sole Proprietor
Apr 4th, 2010 Posted in Finance | no comment »If you are a sole proprietor–a person who runs a business that has not been incorporated—the IRS is targeting you.
You are a sole proprietor if you operate your business without forming a corporation or an LLC.
IRS form Schedule C is used by sole proprietors to deduct business expenses against business income. The two biggest problems for the IRS are fears that income will be under reported and personal expenses will be written off as business deductions.
Many fraudulent businesses have been discovered by the IRS, since business losses can be used to reduce tax liability, enabling the taxpayer to claim the earned income credit, i.e. free money.
That’s why schedule C is the IRS’ most audited form. Simply having a schedule C in your return results in more scrutiny by the IRS.
Isn’t that reason enough to stay away from schedule C?
The IRS targets services businesses–hair stylists,home services and repair persons in addition to professional careers like doctors, lawyers, computer networking people and insurance agents.
The best strategy for service businesses and professionals is to change the way their business is reported.
In other words, AVOID SCHEDULE C!
The solution is to incorporate or form an LLC.
An S-corporation is an excellent alternative to the taboo schedule C. There are many benefits to forming an S-Corp, mainly the fact that S-Corporations don’t pay self employment tax—the additional 15.3% tax due on the profit from a sole proprietorship or partnership.
If you form an LLC to get away from schedule C, you must have other members (partners) in the organization. A single member LLC must file a schedule C, so you would be back in the same boat. Or you could elect to file as an S-corporation, or a partnership by filing a form 8832 (Entity Classification Election) to be classified as another entity.
Please consult a tax professional to help you make the right decision regarding your entity choice. You may have extenuating circumstances which may call for a different plan of action.
Learn more about Sole Proprietors. Stop by Larisa Humphrey’s site where you can find out all about small business taxes and how to save big money.
