Taxation of Sole Proprietorships
 
A sole proprietorship has no separate legal personality from its owner. Consequently, business income generated by a sole proprietor is not taxed under corporate tax codes. Instead, the net business profit is treated as the personal income of the proprietor. It is aggregated with any other personal earnings and taxed using individual graduated progressive tax brackets.
Partnership Pass-Through Mechanics
A partnership is a pass-through entity for tax purposes. The partnership itself does not pay income tax on its earnings. Instead, it must file an annual informational partnership return detailing its total revenues, allowable expenses, and net net profit.
       [ Partnership Net Profit: KSh 1,000,000 ] (No Tax paid at entity level)
                          |
         +----------------+----------------+
         v (50% Share)                     v (50% Share)
  [ Partner A Income ]              [ Partner B Income ]
  KSh 500,000 added to personal     KSh 500,000 added to personal
  tax return; taxed at individual   tax return; taxed at individual
  bracket rates.                    bracket rates.

Allowable vs. Personal Expenses in Business
Sole proprietors and partners often attempt to blend personal and business expenses to lower their tax liability. Tax auditors enforce a strict rule: only expenses incurred wholly and exclusively in the production of business income are allowable. Personal drawings, home utility bills, and private medical insurance cannot be subtracted from business revenues.
 
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