An Overview of Business Forms and Federal Tax Law

Thu Apr 2, 2009 10:12am EDT

This overview provides some basic information on business form and federal taxation. There are other options and details that apply to each form of business. For example, a limited liability company may choose to be treated as a corporation for tax purposes because it provides advantages in terms of deductions that a partnership tax status does not. This chart should help you understand the basics and prepare you for a meeting with your attorney who is equipped to help you decide what business form is best suited to your personal tax situation.

*Sole Proprietorship

Entity: Not an entity separate from the owner, so no separate tax return.

Filing: Owner includes the operations of the sole proprietor-ship on his/her individual tax return.

Federal Employer Tax Number: If a sole proprietor has employees, then a tax number is required.

Multiple Owners: No. If the business has multiple owners it is no longer a sole proprietor-ship.

Taxable Year: Generally, the same as the owner's, which is usually a calendar year.

* Partnership

Entity: Not separate taxable entity, but must file an information tax return.

Filing: Partners include their share of the income, gain, loss, deductions, and credits of the partnership on their personal tax return.

Federal Employer Tax Number: Required.

Multiple Owners: Requires two or more people who carry on a business for profit.

Taxable Year: If all partners do not have the same taxable year, the partnership will have to adopt the taxable year of majority interest or a calendar year if there is no majority interest.

* S Corporation

Entity: Treated as a partnership for tax purposes but may not have more than 75 shareholders

Filing: Shareholders include their share of the income, gain, loss, deductions, and credits of the corporation on their personal tax return.

Federal Employer Tax Number: Required.

Multiple Owners: Usually more than one shareholder. No more than 75 shareholders, who must be individuals, or the IRS will not treat corporation as a partnership for tax purposes.

Taxable Year: Can usually choose its taxable year.

* C Corporation

Entity: A taxable entity separate from its shareholders that may have an unlimited number of shareholders

Filing: Corporation must file and pay taxes at the corporate level; the shareholders must pay taxes on the distributions they receive.

Federal Employer Tax Number: Required.

Multiple Owners: Usually more than one shareholder.

Taxable Year: Can usually choose its taxable year.

* Limited Liability Company

Entity: Not always a separate taxable entity, but must file an information tax return.

Filing: Depending on its election, may choose to be taxed as a partnership or a corporation.

Federal Employer Tax Number: Required.

Multiple Owners: No. Every state except Massachusetts allows single member LLC.

Taxable Year: If members do not all have the same taxable year, the LLC must adopt the taxable year of majority interest or a calendar year if there is no majority interest.

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