Taxes and Business Entities
There are several corporate structures that exist to fit everyone’s needs. From C-Corporations to LLCs, every corporate structure gets taxed differently. This article will highlight some of the major aspects of how each business entity gets taxed and help you choose which one would best suit your style of business.
Sole Proprietor: Filed on a personal income tax return using Form 1040, Schedule C
Sole Proprietor businesses include but are not limited to: freelancers, independent contractors, self-employed, and many business partners who don’t have any partners. Sole proprietorships file taxes on a personal income tax return using IRS Form 1040, Schedule C.
| Advantages | Disadvantages |
| No need to set up any type of legal entity. | Subject to income tax and self-employment tax. |
| IRS Form 1040, Schedule C is due on April 15, along with personal tax return. | Exposed to personal liability and lacks asset protection from business debts and liability. |
S Corporations: Filed on a variation of a corporate income tax return using form 1120S
S Corporations are generally favored by entrepreneurs such as licensed professionals, commissioned sales people and all types of self-employed and family businesses. Many sole proprietors and partnerships convert to an S Corporation for favorable tax treatment. S Corporations file their taxes using IRS form 1120S.
| Advantages | Disadvantages |
| S Corporations do not pay income taxes at the corporate level. Taxpayers save the additional 15.3% self-employment tax assessment. | S Corporations have to file Form 1120S by March 15th. Shareholders must also file a personal income tax Form 1040 by April 15. |
| S Corporation shelter the owner shareholder by placing business and personal assets under the corporate veil. | S Corporations are limited to 100 shareholders and shareholders are limited to U.S citizens, resident aliens, and certain Trusts or Estates. |
C Corporations: Filed on a corporate income tax return using form 1120
Until recently, C Corporations, were mainly utilized by large business merchants, franchises, large investors, and other business conglomerates offering stock on the stock exchange. C Corporations have a fixed corporate tax rate and are used by most all public companies. C Corporations file their taxes using IRS form 1120.
| Advantages | Disadvantages |
| Profits can be kept in the corporation instead of being distributed to shareholders. Tax rate is fixed at 21% | C Corporations are subject to “Double Taxation”. The corporation and the shareholders pay taxes. Dividend distributions are not deductible to the entity. |
| C Corporations issue 1099Ds and must file on form 1120 by April 15th . | Corporations have administrative requirements such as keeping minutes and holding annual shareholder and director meetings. |
Partnership: Filed on a partnership return using form 1065
A partnership is deemed to exist if any two or more individuals or entities jointly carry on a business for profit. Partnerships file their taxes using IRS form 1065.
| Advantages | Disadvantages |
| There is no restriction on ownership and partners can consist of individuals, corporations, LLCs, and trusts or estates. | Partnerships issue K-1s on distributions and file form 1065 which is due by March 15th. |
| Partnerships can be legally structured in multiple ways. | General partners are subject to self-employment tax on income and distributions. |
Limited Liability Company: Filed on forms 1065; 1040 (Schedule C or E), 1120 or 1120S
LLCs are generally the preferred entity structure for certain professionals seeking liability protection and certain landlords whose real estate investment revenues are not subject to self-employment tax.
| Advantages | Disadvantages |
| LLCs have the flexibility to choose their tax treatment as a: S Corporation, C Corporation, Partnership or even a Sole Proprietor. | LLCs are disregarded as entities. Without an approved IRS election, the entity is assigned either as a Sole Proprietorship or a Partnership. |
| An LLC is not required to hold meeting minutes or other internal administrative requirements to keep it in compliance. | Many state records list owners of the LLC publicly. |