Understanding Accounting in a Sole Proprietorship

Basic Accounting Tips for Sole Proprietors

sole proprietor accountingA sole proprietorship is traditionally the easiest business structure to start a new business under.

While it does not offer the same level of liability protection as an LLC or corporation structure, it is preferable for simple businesses that do not require that much protection.

Sole proprietorships also do not require such stringent accounting measures, because the business and its owner are essentially one and the same. Any business income is also considered personal income.

In these cases, the owner does not need to be an accounting whiz in order to keep the books straight.

Here are some helpful tips concerning the role of accounting in a sole proprietorship.

Is an EIN Necessary for a Sole Proprietorship?

An EIN is an Employer Identification Number that is issued by the IRS to certain types of businesses at the time when the business is registered. Sole proprietorships are not required to have an EIN, unless the business owner has filed for bankruptcy before, the individual is the business’s second owner, or the owner is planning on hiring some employees.

Most sole proprietors that operate their business without employees use their personal Social Security Numbers when filing their business taxes.

Should Business and Personal Accounts Be Kept Separate?

The line between personal assets and business assets is often blurry in a sole proprietorship. While keeping financial records and accounts separated is helpful for monitoring the business’s profit and loss margins, it is not necessary, because the business and owner are the same entity.

What Kind of Accounting Ledger Works Best for a Sole Proprietorship?

Because accounting in this business model is simplistic, sole proprietors have flexibility in how they choose to keep track of their finances.

Some use a general ledger complete with sub-ledgers, whereas others find it easier to keep a simple journal or a software program like QuickBooks, where they can record the income and expenses generated by the business.

Sole Proprietor Tax Preparation

The IRS requires that the business’s income and all of the owner’s other income (if applicable), be filed on the individual’s tax form.

Separate forms for the business’s income, expenses, and assets need to be completed and filed, along with the individual’s 1040. In addition, sole proprietors are required to pay quarterly estimated taxes.

Is an Accountant Necessary for a Sole Proprietorship?

Since taxes and accounting is easier with a sole proprietorship, hiring a professional accountant is not necessary, but doing so does have its advantages. For instance, a CPA can help a business owner set up an efficient accounting system that works for their unique business.

Over the course of the year, the owner can maintain basic accounting records, and then turn the records over to their accountant at tax time.

This will not only help improve the chances of the taxes being prepared properly, but a CPA may also be able to help the business increase their deductibles, while reducing their tax liability.


Dave Donovan is a freelance writer and owner of Donovan Copywriting. He has more than seven years of experience as a professional writer, editor, and proofreader. Dave has written extensively for the web with a primary focus on articles targeting finance and business.