It is possible for either the husband or the wife to be the owner of the sole proprietor business. The other person could work in the business as an employee. If the spouses intend to carry on the business together and share in the profits and losses, then they have formed a partnership. See Rev. Proc. 2002-69 for Special Rules for Spouses in Community States.

References:

• Publication 334, Tax Guide for Small Business
• Publication 541, Partnerships

A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), partnership or a corporation. If the LLC has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or sole proprietorship (single member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification ElectionIf a taxpayer does not file Form 8832 (PDF) , a default classification will apply.

References:

• Publication 334, Tax Guide for Small Business
• Tax Topic 103, Small Business Tax Education Program
• Publication 542, Corporations
• Publication 541, Partnerships
• Form 8832 (PDF), Entity Classification Election

The income you earn as an independent contractor generally will be considered income from self-employment and you will need to file Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.

References:

• Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship)
• Form 1040, Schedule C-EZ (PDF), Net Profit from Business
• Instructions for Form 1040, Schedule C
• Form 1040, Schedule SE (PDF), Self-Employment Tax
• Tax Information for Business
• Form 1040ES (PDF), Estimated Tax for Individuals
• Publication 1779 (PDF), Employee Independent Contract Brochure
• Publication 533, Self Employment Tax
• Publication 505, Tax Withholding and Estimated Tax
• Publication 334, Tax Guide for Small Business

As a sole proprietor, you would need to obtain an identification number if either of the following apply: (1) you pay wages to one or more employees, or (2) you file pension or excise tax returns. If these conditions do not apply, your social security number is your taxpayer identification number.

References:

• Publication 334, Tax Guide for Small Business
• Publication 1635 (PDF), Understanding Your EIN
• Simplified Tax and Wage Reporting System (STAWRS), Employer Identification Number

If both of you carry on a business together and share in the profits and losses, you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that is important for determining your self-employment income. If you work for your spouse, you should receive a Form W-2, showing taxes withheld and the owner spouse would claim the wages paid to you as a deduction. Both a partnership and a sole proprietor with an employee must have an EIN.

References:

• Publication 541, Partnerships
• Publication 334, Tax Guide for Small Business
• Publication 1635 (PDF), Understanding Your EIN

A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns is the only business person who does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.

References:

• Publication 334, Tax Guide for Small Business
• Publication 1635 (PDF), Understanding Your EIN
• Tax Information for Business.

You can use Form 1040, Schedule C-EZ (PDF) to determine your net profit if you have only one sole proprietorship and you meet all of the following requirements: your business expenses were not more than $2,500, and you did not have a net loss from your business, you use the cash method of accounting, and you did not have an inventory during the year. There are other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax Topic 408, Sole Proprietorship.

References:

• Form 1040, Schedule C-EZ (PDF), Profit or Loss from Business (Sole Proprietorship)
• Tax Topic 408, Sole Proprietorship

When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business does not require notation as a final return because the business is not a separate entity from the sole proprietor. You simply quit filing a Schedule C with your income tax return.

References:

• Publication 535, Business Expenses
• Publication 544, Sales and Other Dispositions of Assets
• Form 1040, Schedule C (PDF), Profit or Loss from Business

To determine which form you should file for your business entity, select one of the following links:

. Publication 541, Partnerships

. Publication 542, Corporations

. Publication 3402 (PDF), Tax Issues for LLCs

. Publication 334, Tax Guide for Small Business

. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

References:

• Publication 541, Partnerships
• Publication 542, Corporations
• Publication 3402 (PDF), Tax Issues for LLCs
• Publication 334 Tax Guide for Small Business
• Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation