Taxation of a Sole Proprietorship

The taxation of a sole proprietorship has both advantages and disadvantages. In contrast to a corporation, the economic double taxation is eliminated in the taxation of a sole proprietorship.

Taxation of a Sole Proprietorship

As mentioned above, the taxation of a sole proprietorship has advantages and disadvantages. It is important to know that sole proprietorships, partnerships, and limited partnerships are not taxed as corporations. Taxation takes place at the level of the individual partners. One advantage of a sole proprietorship is that there is no economic double taxation. For example, this can occur with a stock corporation (AG), since distributions are double-taxed. To cushion this, the participation deduction was created, which reduces the consequences of this tax double burden. Double taxation occurs because the distribution of a dividend is taxed as profit at the company level and as income at the shareholder level.

On the other hand, the sole proprietorship also has disadvantages in terms of tax law. For example, in the case of business cessation or when selling the sole proprietorship. If one of these events occurs, liquidation taxation applies. The sale of a sole proprietorship constitutes income from self-employed work and is therefore also taxed as income to the owner.

In general, it should be noted that the tax burden can be reduced through a series of legal measures. For example, through depreciation or provisions. However, these cannot be arbitrarily high, but must be justified. In determining the permissible amount, tables can be referred to, which indicate the possible annual depreciation in percentage points.