A sole proprietorship is a simple form of business which operates as an alter ego of the owner. Because the owner of the sole proprietorship is personally responsible for its business activities, he can avoid many of the legal and tax formalities that other types of business entities must follow.
Individual Tax Return
A sole proprietorship reports business income and expenses on Schedule C of the owner's individual tax return, IRS Form 1040. The owner must include Schedule C for any year the business was active, whether the sole proprietorship was profitable or not. An active sole proprietorship is defined as one that had either income or expenses during the tax year.
Read More: Do I Need to File a Tax Return for LLC With No Activity?
Going Out of Business
There is no requirement to notify the IRS that a sole proprietorship is going out of business. The owner can simply stop including a Schedule C with his 1040 when the business becomes inactive and is without income or expenses for an entire tax year.
Reopening the Business
If a sole proprietor decides to reopen the business in a future year after ceasing to file a Schedule C, tax filing rules require that he place a check mark in the box on Line H of Schedule C to indicate that he has started or acquired the business in that tax year.
Other Filing Requirements
Filing a final Schedule C does not relieve the sole proprietor from the obligation to file final employment-related tax returns if the business had employees. This is an important business tax requirement and should be timely and accurately filed with the IRS when closing a sole proprietorship.
Jeff Clements has been a certified public accountant and business consultant since 2002. He has also worked in private practice as an attorney. Clements founded a multi-strategy hedge fund and has served as its research director and portfolio manager since its inception. He holds a Juris Doctor, as well as a master's degree in accounting.