How do the income statements of a sole proprietorship and a regular corporation differ?
The income statement of a sole proprietorship will not report any salary expense for the sole proprietor who works in the business. However, if the business is a regular corporation, the income statement will report as salary expense the amount that the stockholder earned by working in the business. Another difference involves income tax expense. The income statement of a sole proprietorship will not report income tax expense, since the owner (and not the business) is responsible for U.S. income taxes. On the other hand, a regular corporation is a taxpaying entity and it is responsible for U.S. income taxes. As a result of these two differences, the net income (which is the bottom line of the income statements) will be different. In the case of the sole proprietorship, the net income is the total amount that the owner has earned before income taxes for 1) the capital invested in the business and 2) the owner’s compensation for working in the business. In the case of a regular corporation owned by one person, the owner has earned the salary (which was included in salary expense on the income statement) and has also earned the reported amount of net income or net loss. Neither the draws made by the sole proprietor nor the dividends distributed by a regular corporation are reported on the income statement.
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