Understanding Sole Proprietorships, Single-Member LLCs, and the Schedule C

If you’re a sole proprietor or a single-member LLC owner, you’re likely familiar with the unique advantages and challenges of running your own business. While these business structures offer simplicity and flexibility, they also require careful attention to tax and legal requirements. In this article, we’ll provide a refresher on the basics of sole proprietorships and single-member LLCs and dive deeper into the details of the Schedule C form, which must be filed annually by these types of entities.

What exactly is a sole proprietor? 

A sole proprietor is an individual who operates and owns their business entirely on their own. It is the simplest form of business organization and does not require any formal registration with the government. The individual owner has full control and responsibility for all aspects of the business, including financial and legal obligations. Unlike corporations or LLCs, a sole proprietorship is not a separate legal entity from its owner, meaning the owner is personally liable for any debts or legal issues incurred by the business. 

Sole proprietorships may cover side gigs - so if you provide any freelance work in addition to your primary job, it could be considered a sole proprietorship. It’s worth noting that if you have multiple side gigs or different types of businesses, you’ll need to file a separate Schedule C for each gig or type of business. This ensures that each business’s income and expenses are tracked separately for tax purposes and can help you stay organized and avoid potential issues. 

What is a single-member LLC?

A single-member LLC is a limited liability company with only one owner or member. Like a regular LLC, a single-member LLC provides personal liability protection for the owner’s assets in case of business liabilities or debts. 

One of the key advantages of a single-member LLC is that it offers the flexibility and simplicity of a sole proprietorship while still providing liability protection for the owner. This means that the owner can manage and control the business without the need for complex governance structures or formalities. Additionally, a single-member LLC is taxed as a pass-through entity, meaning that the business itself does not pay taxes, but rather the profits and losses flow through to the owner’s personal tax return. 

The Schedule C form

Since sole proprietorships and single-member LLCs are considered pass-through entities, owners will need to file a Schedule C with their Form 1040. 

When completing the Schedule C form, it’s important to have several pieces of information available. First and foremost, you’ll need accurate records of all the income your business received during the tax year. This can include payments from clients or customers, as well as any other sources of income such as interest or investment earnings. You’ll also need to track all of your business expenses, including office rent, supplies, travel expenses, and advertising costs. Keeping detailed records of these expenses throughout the year will make it much easier to complete the Schedule C form accurately and efficiently. 

In addition to income and expenses, the Schedule C form requires business owners to provide information such as business name, address, Employer Identification Number (EIN), inventory information, and accounting method.

Schedule C vs. W-2 vs. 1099-NEC

A W-2 reports income received as an employee of a business. A 1099-NEC reports income received as an independent contractor or other non-employee job. If you receive a 1099-NEC, you will likely need to report that income on a Schedule C. 

This article provides a brief overview of Sole Proprietorships, Single-Member LLCs, and Schedule C filing requirements. It is not a substitute for speaking with one of our expert advisors. Please contact our office if you have questions about properly reporting your income or preparing your tax return.