Sole Proprietor  

• A sole proprietor is someone who owns an “unincorporated” business by himself or herself. A sole proprietor can be an LLC as long as you do not treat the LLC as a corporation.
• Sole Proprietors are subject to self-employment tax on business profits.
• Business is reported on Schedule C of the business owners individual tax return 1040.
• Sole proprietors may have employees and are subject federal and state employment taxes.

 

Partnership

•  A partnership is a business that is owned by two or more people. Each of the partners shares in the profits and/or losses of the business according to partnership agreement drawn.
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    • The partnership must file an annual return 1065 to report business activity for the year of income, deductions, losses, etc…. No taxes are paid by the partnership, instead the profits or losses flow to the individual partner’s tax return.
    • Partners cannot be employees of their business. Partners will receive a K-1 form from the partnership return to include in their personal taxes.
    • A partnership may have employees and are subject to employment taxes.

 

 Corporations

•  A corporation is formed when shareholders exchange money, property, or both for the corporations capital stock.
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    • For tax purposes, a C Corporation is recognized as a separate legal entity and must file an 1120 tax return at the end of its fiscal year.
    • A corporation conducts business, realizes net income or loss, pays taxes, and distributes profits to its shareholders.
    • Double-taxation occurs with C-Corporations. The corporation is taxed on its profits when earned, and then taxed to shareholders as divedends are distributed.

 

S Corporation

•  S Corporations are corporations that elect to pass profits or losses through to their shareholders for federal tax purposes. This eliminates the double taxation on the corporate income. Shareholders of S corporations report the flow-through of income or losses on their personal return. S corporations file Form 1120S.
• To qualify for S corporation status, the following requirements must be met:
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    • Be a domestic corporation
    • Shareholders may not be partnerships, corporations, or non-resident alien shareholder
    • Have no more than 100 shareholders
    • Have one class of stock
    • Not be an ineligible corporation
    • To qualify, the corporation must submit Form 2553 Election by a Small Business Corporation signed by all shareholders

 

Limited Liability Company (LLC)

•  A Limited Liability Company (LLC) is a business structure allowed by state statute. With this business designation, owners have limited personal liability for the debts and actions of the LLC.
• The LLC structure does not remove owners liabltiy of debts personally guaranteed for the business.
• Owners of an LLC are called memebers. Members may include individuals, corporations, other LLC’s, and foreign entities. There is no maximum number of members.
• An LLC can be formed with one sole member as a sole proprietor, a partnership, or a corporation. There is no separate classification for LLC’s. Depending upon its structure, the LLC must file as a sole proprietor, partnership, or corporation.