How Long to Keep Returns for a Sole Proprietorship?

By Elizabeth Rayne

A sole proprietorship is a common business structure because it is relatively straight forward to set up and has fewer filing and tax requirements than other business entities. However, like any business, sole proprietors must maintain business records. A sole proprietorship is formed by a single owner who may do business in his own name and remains personally liable for the debts of the business.

Business Records

All businesses must maintain records, not only for tax purposes but also to monitor the progress of the business. The IRS requires that all businesses track and report business income. It also allows businesses to reduce income for tax purposes by certain expenses necessary to doing business. However, these expenses must be substantiated by receipts.

Sole Proprietorship Taxes

A sole proprietorship is not considered a separate legal entity, meaning that the business is simply an extension of the owner. The sole proprietorship is not taxed separately. Instead, the owner reports income from a sole proprietorship on his personal income taxes. Sole proprietor income and expenses are reported on Schedule C and included with form 1040. Sole proprietors must pay self-employment taxes to the IRS in addition to personal income tax.

Ready to start your LLC? Start an LLC Online Now

Tax Returns

The IRS recommends that both individuals and businesses hold onto their returns through the period of limitations for collecting unpaid taxes. Generally, the IRS may collect taxes for three years after you filed your personal return. However, if you had unreported income that was more than 25 percent of your income shown on your return, the IRS has six years to bring a claim against you. If you filed a fraudulent return, there is no deadline for the IRS to pursue a claim against you. In addition to maintaining the returns themselves, you must also hold onto all supporting documents, such as receipts for expenses you reported on your tax return. If your business has employees, the IRS recommends that you hold onto your records for at least four years after employment tax is paid.

Nontax Recordkeeping

After the period for tax collection has expired, there may be other reasons to continue to hold onto your tax returns and records. Your insurance company or creditors may require you to hold onto records for a longer period of time, for example. If you have employees, you must maintain personnel records for a year after an employee leaves, and payroll records must be held onto for three years. Essentially, you should hold onto business records for as long as there may be any legal claim that would require you to access old records.

Ready to start your LLC? Start an LLC Online Now
Do I Need to Pay Taxes if I Do Not Make Revenue As a Sole Proprietor?


Related articles

The Advantages of Sole Proprietorship in Illinois

Your decision about how to structure your business is one of the first and most important decisions you make as a business owner. Though sole proprietorships expose their owners to increased risk of liability, an Illinois sole proprietorship has a number of advantages that may fit your situation better than other business structures.

Sole Proprietorship & Capital Gains

Sole proprietorships are businesses owned by one person. Instead of reporting the income, gains and losses on a separate return, a sole proprietor includes his business’s annual fiscal activity on his personal tax return. A sole proprietor should include any capital gains the business might earn on his personal return. If you are a sole proprietor, you should consider consulting a certified public accountant or attorney when filing your returns.

How to Transfer an EIN to a New DBA

"Doing Business As" names and Employer Identification Numbers serve important, yet distinct, purposes in business operations. A DBA allows a business to operate under a name other than its legal name, while an EIN serves to identify the company to the state and federal authorities for tax purposes. A business generally only has one EIN but may change DBAs. If a business chooses to change its DBA name, it must do so at the state or local level. However, because a business only has one EIN, a new DBA is automatically tied to the old EIN.

LLCs, Corporations, Patents, Attorney Help LLCs

Related articles

Sole Proprietorship & Retained Earnings

Small business owners that organize as sole proprietorships enjoy fairly simple accounting and tax-paying chores. Like ...

Do I Need to File a Tax Return for LLC With No Activity?

The Internal Revenue Service imposes separate tax return filing requirements on different types of business ...

How to Fill Out a W9 for a Sole Proprietor

If you own and operate a business and choose to run it as a sole proprietorship rather than creating a separate ...

Sole Proprietorship Business Deductions

Despite the fact that a sole proprietorship isn’t treated as being a separate and distinct entity from its owner, the ...

Browse by category
Ready to Begin? GET STARTED