Sole Proprietorship
Definition
The simplest business structure, where an individual operates a business without forming a separate legal entity. All income and expenses are reported on Schedule C of your personal tax return. Net profit is subject to both income tax and self-employment tax (15.3%). There is no legal separation between you and the business, meaning personal assets are at risk for business debts. Most freelancers, gig workers, and independent contractors are sole proprietors by default.
Example
You earn $50,000 from freelance work with $10,000 in business expenses. You report $40,000 net profit on Schedule C, pay income tax based on your bracket, and owe approximately $5,652 in self-employment tax (after the deduction for the employer-equivalent portion).
Related Terms
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