Difference Between Sole Proprietorship & Corporations in Taxes
An entrepreneur makes plenty of key decisions in launching a business. Chief among them is the business structure to use, and tax considerations weigh heavily in making that decision. The tax distinction between a corporation and a sole proprietorship is stark.
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Sole Proprietorship Taxes
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Sole proprietors are subject to “single taxation” meaning the earnings from a sole proprietorship are only taxed once – at the individual level. However, sole proprietors must pay self-employment tax, which generally approximates an employer’s portion of social security and Medicare taxes and is deductible to the sole proprietor. Sole proprietors must also pay the employee portion of these taxes, much like employees of a corporation.
Corporate Taxes
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A corporation’s net income is taxed at the corporate level and also at the individual level when dividends are paid to shareholders. This double-taxation structure is the primary tax drawbacks to the corporate structure, although non-tax considerations also factor into the decision to choose a corporate structure.
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Estimated Payments
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Both corporations and sole proprietors pay estimated taxes during the year, generally on a quarterly basis. Corporations use form 1120-W to pay estimated taxes while sole proprietors use form 1040-ES. The annual corporate tax return, form 1120, is due in the third month following the end of the tax year (March 15 for calendar year taxpayers), while sole proprietors file Schedule C of Form 1040 by April 15.
Non-Tax Considerations
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Although corporate income is subject to tax at the entity level and the shareholder level, shareholders are generally not liable for corporate debt, which provides a level of protection not available to sole proprietors. Corporations also have continuity, meaning the entity continues regardless of the founders or leaders. A sole proprietorship ends when it is discontinued by the owner or upon the owner’s death. A sole proprietorship is also considerably easier to begin, with fewer required legal filings.
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