What's the Difference Between a Sole Proprietorship and a Partnership for Taxes?

A sole proprietorship and a partnership are both pass-through business structures, meaning the business itself doesn't pay income tax, but they differ in how income is reported and shared. A sole proprietorship has one owner who reports all business income and expenses on Schedule C of their personal tax return, and the net profit is subject to both income tax and self-employment tax. A partnership has two or more owners who share profits according to the partnership agreement, and the partnership files an informational return (Form 1065) that issues Schedule K-1 forms to each partner showing their share of income, deductions, and credits. Each partner then reports their K-1 income on their personal return and pays self-employment tax on their share of business income. Adding a partner changes your business from a sole proprietorship to a partnership by default, which requires a new tax identification number and a separate business return.