The sole proprietorship is the simplest form of business entity. Legally speaking, an owner of a proprietorship is inseparable from his company. There may only be one owner at a time of a sole proprietor business. Business profits and loses are passed through to be reported on the owner's personal tax form, Form 1040, Schedule C. A disadvantage of sole proprietorships is that the owner has unlimited personal liability when it comes to the business.
Ownership of your client's business can be shared with his/her spouse and will still maintain the status as a sole proprietorship. However, in the eyes of the IRS, your client's spouse will be viewed a co-sole proprietor. In this case, your client can choose to split the profits of the business if they file separate returns or they can report all of them on their joint Schedule C. Only spouses qualify to be a co-sole proprietor. When joining with any other member of their family, the business must be organized as a partnership, limited liability company, C corporation or S corporation.
Tax sheltered retirement plans, such as a Keogh plan, are available for owners of sole proprietorships. Therefore, as far as retirement plans go, a sole proprietorship is equal with a corporation. However, the sole proprietorship lags when it comes to medical expenses in comparison to a corporation. This is because a sole proprietor can only deduct up to 40% of his family's health insurance premiums on the Form 1040. The remaining 60% can be deducted as an itemized deduction on Schedule C, but only to the extent that the 60% of the premiums exceed 7.5% of your client's adjusted gross income for the year. In a corporation, if your client hires himself/herself as an employee, the corporation can pay for 100% of their family's health insurance premiums and uncovered medical expenses and then take these amounts as a business deduction.
Following are some more pros and cons that come with operating a sole proprietorship: