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Small Business Tax Questions: What Is A Sole Proprietor?

By Wayne M Davies

Republish: EasyPublish™
Published: 20Feb2012
Word count: 487
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There are many terms used to describe the small business owner. The purpose of this article is to focus on one particular type of small business owner -- the sole proprietor -- so you can determine whether you fall into this category for tax purposes.

One of the best definitions of a sole proprietor is found in IRS Publication 334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ). The IRS describes the sole proprietor as a person who owns an unincorporated business by himself or herself.

There are several key parts to this definition:

1. You own a business that is unincorporated. In other words, your business is not a corporation.

But what about a limited liability company or "LLC"? Here's where the definition of sole proprietor can get a little tricky. An LLC is a separate legal entity and is formed according to the laws of each state. But an LLC can be taxed like any of the other tax entities, including a sole proprietorship.

Here's how that works. A single-member LLC (SMLLC) can be taxed like a sole proprietorship or a corporation. A multi-owner LLC can be taxed like a partnership or a corporation. So if your business happens to be a single-owner LLC, it can also be a sole proprietorship for tax purposes, if you want it to be. It's up to you. If you do not notify the IRS that you want your SMLLC to be taxed as a corporation, then your LLC will automatically be taxed as a sole proprietorship.

2. You own a business by yourself. In other words, your business is not a partnership. You are the only owner of the business and you receive all profits (if there are any) and you also absorb any losses.

Another way to define a sole proprietor is by way of the following synonyms:

1. Self-employed. This is a commonly used term and is used interchangeably with sole proprietor. This term again conveys the idea that you are "flying solo"; your business is a "one man (or one woman) band".

The IRS defines the self-employed person as one who carries on a trade or business as an independent contractor. Which leads us right to the next synonym.

2. Independent Contractor. Again, the concept of being "independent" conveys the idea that you own the business yourself and while you may have employees or sub-contractors to assist you in doing the work of your business, you are the only owner of your business. The term is also used to communicate the idea that you are not the employee of any other business.

3. Freelancer. This term is similar to independent contractor and also communicates the idea that you are offering your services to the general public and are not an employee of any one business.

Looking for more ways to increase your deductions and slash your taxes? Get your free copy of the Special Report, "How To Instantly Double Your Small Business Tax Deductions" at www.YouSaveOnTaxes.com. Wayne Davies is the Internet's top tax preparer and author of 3 ebooks on tax deduction strategies for small business owners and the self-employed.

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