chapter 2: identify the tax advantages and disadvantages of sole proprietorship
ADVANTAGE OR DISADVANTAGE: the proprietor's marginal tax rate may be lower than the marginal tax rate that would have applied had the business been organized as a corporation
ADVANTAGE
name the six tax advantages of sole proprietorship
1) not subject to taxation as a separate entity; the sole proprietorship, as an individual, is taxed at his or her marginal rate on income earned by the business 2) the proprietor's marginal tax rate may be lower than the marginal tax rate that would have applied had the business been organized as a corporation 3) the owner may contribute cash to, or withdraw profits from, the business without tax consequences 4) although the owner usually maintains separate books, records, and bank accounts for the business, the money in these accounts belongs to the owner personally 5) the owner may contribute property to, or withdraw property from, the businesses without recognizing gain or loss 6) business losses may offset non-business income, such as interest, dividends, and any salary earned by the sole proprietorship or his or her spouse, subject to the passive activity loss rules
name the six disadvantages of sole proprietorship
1) the profits of a sole proprietorship are currently taxed to the individual owner, whether or not the profits are retained in the business or withdrawn for personal use; by contract the profit of a corporation are taxed to its shareholders only if and when the corporation distributes the earnings as dividends 2) at times, corporate tax rates have been lower than individuals tax rates; in such times, businesses conducted as sole proprietorships have been taxed more heavily than businesses organized as corporations 3) a sole proprietorship must pay the full amount of social security taxes because they aren't considered to be an employee of the business; by contrast, shareholder-employees must pay only half of their social security taxes; the corporate employer pays the other half 4) sole proprietorships may not deduct compensation paid to owner-employees; by contrast, corporations may deduct compensation paid to shareholder-employees 5) certain tax-exempt benefits available to shareholder-employees are not available to owner-employees 6) must use the same accounting period for business and personal purposes thus they can't defer income by choosing a business fiscal year that differs from the individual's calendar year; by contrast, a corporation may choose a fiscal year that differs from the shareholder's calendar year
ADVANTAGE OR DISADVANTAGE: although the owner usually maintains separate books, records, and bank accounts for the business, the money in these accounts belongs to the owner personally
ADVANTAGE
ADVANTAGE OR DISADVANTAGE: business losses may offset non-business income, such as interest, dividends, and any salary earned by the sole proprietorship or his or her spouse, subject to the passive activity loss rules
ADVANTAGE
ADVANTAGE OR DISADVANTAGE: not subject to taxation as a separate entity; the sole proprietorship, as an individual, is taxed at his or her marginal rate on income earned by the business
ADVANTAGE
ADVANTAGE OR DISADVANTAGE: the owner may contribute cash to, or withdraw profits from, the business without tax consequences
ADVANTAGE
ADVANTAGE OR DISADVANTAGE: the owner may contribute property to, or withdraw property from, the businesses without recognizing gain or loss
ADVANTAGE
ADVANTAGE OR DISADVANTAGE: a sole proprietorship must pay the full amount of social security taxes because they aren't considered to be an employee of the business; by contrast, shareholder-employees must pay only half of their social security taxes; the corporate employer pays the other half
DISADVANTAGE
ADVANTAGE OR DISADVANTAGE: at times, corporate tax rates have been lower than individuals tax rates; in such times, businesses conducted as sole proprietorships have been taxed more heavily than businesses organized as corporations
DISADVANTAGE
ADVANTAGE OR DISADVANTAGE: business losses may offset non-business income, such as interest, dividends, and any salary earned by the sole proprietorship or his or her spouse, subject to the passive activity loss rules
DISADVANTAGE
ADVANTAGE OR DISADVANTAGE: certain tax-exempt benefits available to shareholder-employees are not available to owner-employees
DISADVANTAGE
ADVANTAGE OR DISADVANTAGE: sole proprietorships may not deduct compensation paid to owner-employees; by contrast, corporations may deduct compensation paid to shareholder-employees
DISADVANTAGE
ADVANTAGE OR DISADVANTAGE: the profits of a sole proprietorship are currently taxed to the individual owner, whether or not the profits are retained in the business or withdrawn for personal use; by contract the profit of a corporation are taxed to its shareholders only if and when the corporation distributes the earnings as dividends
DISADVANTAGE
