Sole Proprietorship Overview

• Sole proprietorships are the easiest type of businesses to establish. Typically, a sole proprietor must obtain a professional business license and register his business with the Internal Revenue Service. Many states require that sole proprietorships register DBA or "doing business as" names, but in most states, sole proprietors can begin business activities as soon as they obtain any required professional licenses and certificates.
  
  In most states, sole proprietors are not responsible for paying unemployment insurance taxes if they have no employees. Furthermore, many states allow them to waive self-coverage for workers' compensation benefits. However, in most states, sole proprietors are required to purchase workers' compensation coverage if they have employees. Sole proprietors maintain personally liable for their business and tax debts. Unlike corporations, sole proprietors do not pay taxes on their business profits and their dividends, and the IRS does not treat them as separate entities from their businesses.
  
  

Corporation Overview

• Corporations are more difficult to set up than sole proprietorships. In most states, incorporators must complete registration paperwork with their secretary of state and file initial articles of incorporation. Incorporators are responsible for designating a registered agent to accept legal papers on behalf of their businesses. Corporations are typically required to hold annual meetings and designate an original board of directors. In most states, corporations are responsible for paying state unemployment taxes and purchasing workers' compensation insurance for their employees. However, in some states, corporate officers can waive self-coverage. Additionally, corporations are responsible for registering their businesses with the IRS.
  
  

Corporation Taxation

• Since corporations are taxed twice -on their corporate profits and shareholders' earnings--corporate owners are not able to take advantage of the "pass-through" tax treatment that sole proprietors enjoy. However, corporate owners benefit from limited personal liability for business and tax debts, unlike sole proprietors. As such, corporate owners cannot commingle their personal funds with corporate funds or they may be held personally liable for repaying corporate debts. Corporate owners must file an IRS Forms 1120, U.S. Corporation Income Tax Return and 1120-W, Estimated Tax for Corporations. Additionally, each shareholder must report her profits and losses on corporate dividends.
  
  

Sole Proprietorship Taxation

• Since the IRS does not treat sole proprietors as separate from their companies, they are not required to file taxes any differently than most individuals. Sole proprietors must use IRS Form 1040, U.S. Individual Income Tax Return and Schedule C, Profit or Loss From Business, to report their losses and profits. Furthermore, they may have to use IRS Form, 1040-ES, Estimated Tax for Individuals, to report and pay their taxes on a quarterly basis. Sole proprietors with employees must pay self-employment taxes on their employees and withhold self-employment taxes on their own profits.
  
  

Considerations

• Because business laws frequently change, do not use this information as a substitute for legal advice. Seek advice through an attorney licensed to practice law in your state.