What Is A Sole Proprietorship And How Is It Taxed?
A sole proprietor is an individual (or married couple) who carries on a trade or business for profit. An individual who earns money while engaged in a hobby activity may or may not be treated as a sole proprietor, depending on the amount of profits made by the individual. A sole proprietor and his or her business are indistinguishable for legal purposes. The owner reports business profits and losses on his or her personal tax return every year and is personally responsible for business debts. The business does not file its own tax return. When the owner dies, a sole proprietorship venture terminates for federal tax purposes.
If You Establish A Sole Proprietorship And Transfer Property To The Business, What Are The Tax Consequences?
Because the proprietor personally owns all of the sole proprietorship's assets and reports all of its income and expenses on his or her personal income tax return, the proprietor may transfer assets to a proprietorship without tax consequences. In other words, there is no taxable gain recognized when contributing property to the business or when removing assets from the business.
What Are The Record-Keeping Requirements?
All businesses, including sole proprietorships, are required to keep track of income and expenses. Moreover, personal records should be kept separate from business records to make audits easier. For instance, if you take money from your sole proprietorship for personal use, you should write a check from your business account to your personal account.
There is, however, no requirement that you maintain a separate business bank account. In fact, it is perfectly permissible for a sole proprietor to take cash out of the cash register or to buy personal items from the business checking account. Because an Internal Revenue Service audit is always a possibility, however, it would be wise to follow standard business protocol and to make a record of any cash removed from the cash register or otherwise used to pay personal expenses. For more information, contact an accountant or tax attorney.
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