What are the tax benefits of a sole proprietorship versus a partnership?

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Whenever someone starts a business, they have to decide on a tax structure for their company. Most people choose either a sole proprietorship or a partnership. These options offer low-cost set up and no extra taxation of income, among other benefits. However, a sole proprietorship works for only one person while a partnership works for a business with several owners.

There are certainly some benefits to a sole proprietorship, but also some drawbacks. It is by far the easiest type of business to start, and there are fewer regulations involved. Also, you have to answer to no one but yourself; you are the sole owner of the business. However, sole proprietorships can be risky. All your personal finances are tied to the business, so if the business goes bankrupt, so does the owner. Sole proprietorships are also responsible for paying income taxes and self-employment taxes. So, as the business becomes more profitable, you owe more in taxes.

A partnership, on the other hand, is formed between two or more individuals. This structure also has to pay taxes, but the owners are not separately taxed for self-employment. Businesses that are partnerships also do not have to pay an income tax; each partner files the profit or losses of their business as part of their individual tax return, so the business is not taxed separately. However, partnerships are more difficult to set up than sole proprietorships, and you are often financially dependent on the other partner(s) in the business.

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