The IRS has given us plenty of warning on this big red flag: The Sole Proprietorship. If you start a business and don’t form a business structure, you have a Sole Proprietorship. If you form a single member limited liability company (SM LLC) and don’t elect how you want to be taxed, you have a Sole Proprietorship. If you get a Form 1099-MISC from someone you do work for, chances are you have a Sole Proprietorship. If you join a MLM or sell on eBay, you have a Sole Proprietorship. It’s easy to see how people end up with this form of business, it’s the default if you do something wrong or if you fail to do something right.
If you have a Sole Proprietorship, you’ll have full liability on anything personal you own. That means if something goes wrong with the business, someone can take your house, your car or even your kid’s college education fund.
There is a second problem with a Sole Proprietorship. If you have net income with your business, you’ll pay an additional 15.3% in self-employment tax. This is Social Security + Medicare tax times two.
The biggest problem is that these have always been an IRS target. Why? It’s the only business structure that you don’t have to have a full set of financial statements for. You don’t need to report a balance sheet when you file. It’s easy. It’s quick. Heck, you can even make numbers up – or at least that’s what the IRS thinks you’re doing. And because people are drawn to this structure because it’s easier, they figure that people will be sloppy with their record-keeping. So far, they’ve hit paydirt with these audits.
That’s why 1 out of 3 will get audited this year. Yep, that’s right – 1 out of 3 Sole Proprietorships will get audited.
How do you fix it? Get the right business structure quick!