A sole proprietor is someone who owns an unincorporated business by themselves. If you are the sole member of a domestic limited liability company (LLC) and elect to treat the LLC as a corporation, you are not a sole proprietor.
Reasons Why does a Company Pay Income Tax yet a Sole Proprietor does not
Here are a few examples of why a company pays income tax while a sole proprietor does not:
- Legal Entity: A company is considered a separate legal entity, meaning it can enter into contracts, own property, and be held liable for its actions. A sole proprietor, on the other hand, is considered a self-employed individual and is not considered a separate legal entity. As such, a company is required to pay income tax on its profits, while a sole proprietor is taxed on their personal income.
- Taxable Income: A company’s taxable income is calculated based on its profits, while a sole proprietor’s taxable income is calculated based on their personal income. This means that a company may be required to pay a higher income tax rate than a sole proprietor.
- Tax Credits: Companies can claim tax credits on certain expenses, such as employee benefits and research and development costs, which can reduce their taxable income. A sole proprietor, on the other hand, does not have the same tax credit options and is taxed on their personal income.
- Capital Gains Tax: A company is subject to capital gains tax, which is a tax on the sale of assets that have increased in value. A sole proprietor is not subject to capital gains tax and is only taxed on their personal income.
- Dividends Tax: A company is subject to dividends tax, which is a tax on the distribution of profits to shareholders. A sole proprietor is not subject to dividends tax and is only taxed on their personal income.