How do taxes apply to a sole proprietorship?
Taxes are not generally a complicated issue for sole proprietorships, as they can be for other forms of businesses. This is because sole proprietorships are not a separate legal entity from their owner and, therefore, do not need to file their own tax return. The business earnings and losses are simply reported on the owner’s personal tax return. So if you own a sole proprietorship, you simply deduct all of your business expenses on your own return and, similarly, report any business earnings as additional personal income.
While it is not necessary that you keep your personal and business finances separate, as it is with most other business entities, it is still a good idea to do so. Similarly, even though the business is not a separate legal entity, you should definitely maintain detailed and careful financial records, to ensure that your tax return is prepared accurately.