When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.
Sole Proprietorships
A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
If you are a sole proprietor use the information in the chart below to help you determine some of the forms that you may be required to file.
| IF you are liable for: | THEN use Form: | Separate Instructions: |
|---|---|---|
| Income Tax | 1040, U.S. Individual Income Tax Return (PDF) and Schedule C (Form 1040), Profit or Loss from Business(PDF) orSchedule C-EZ (Form 1040), Net Profit from Business (PDF) | Instructions for1040, U.S. Individual Income Tax Return(PDF) Instructions for Schedule C (Form 1040) (PDF) |
| Self-employment tax | Schedule SE (Form 1040), Self-Employment Tax (PDF) | Instructions for Schedule SE (Form 1040) (PDF) |
| Estimated tax | 1040-ES, Estimated Tax for Individuals (PDF) | |
| Social security and Medicare taxes and income tax withholding | 941, Employer’s Quarterly Federal Tax Return (PDF)943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF)944, Employer’s Annual Federal Tax Return (PDF) | Instructions for Form 941 (PDF)Instructions for Form 943 (PDF)Instructions for Form 944 (PDF) |
| Providing information on social security and Medicare taxes and income tax withholding | W-2, Wage and Tax Statement(PDF) (to employee) and W-3, Transmittal of Wage and Tax Statements (PDF) (to the Social Security Administration) | |
| Federal unemployment (FUTA) tax | 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) | Instructions for Form 940 (PDF) |
| Filing information returns for payments to nonemployees and transactions with other persons | See Information Returns | |
| Excise Taxes | Refer to the Excise Tax web page |
Partnerships
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.
Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.
If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.
| If you are a partnership then you may be liable for… | Use Form… | Separate Instructions… |
|---|---|---|
| Annual return of income | 1065,U.S. Return of Partnership Income (PDF) | Instructions for Form 1065 U.S. Return of Partnership Income (PDF) |
| Employment taxes:Social security and Medicare taxes and income tax withholdingFederal unemployment (FUTA) taxDepositing employment taxes | 941, Employer’s Quarterly Federal Tax Return(PDF) and 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees) (PDF)940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) | Instructions for Form 941 Employers QUARTERLY Federal Tax Return (PDF)Instructions for Form 943 Employers Annual Federal Tax Return for Agricultural Employees (PDF)Instructions for Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return (PDF) |
| Excise Taxes | Refer to the Excise Tax Web page |
| If you are a partner (individual) in a partnership then you may be liable for… | Use Form… | Separate Instructions… |
|---|---|---|
| Income Tax | 1040, U.S. Individual Income Tax Return(PDF) and Schedule E (Form 1040), Supplemental Income and Loss (PDF) | Instructions for 1040 U.S. Individual Income Tax Return(PDF) Instructions for Schedule E (Form 1040) (PDF) |
| Self-employment tax | 1040, U.S. Individual Income Tax Return(PDF) and Schedule SE (Form 1040), Self-Employment Tax (PDF) | Instructions for Schedule SE (Form 1040) (PDF) |
| Estimated tax | 1040-ES, Estimated Tax for Individuals(PDF) |
Corporations
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
If you are a C corporation, use the information in the chart below to help you determine some of the forms you may be required to file.
Corporations that have assets of $10 million or more and file at least 250 returns annually are required to electronically file their Forms 1120 and 1120S for tax years ending on or after December 31, 2007. For more e-file information, see References/Related Topics listed below.
Corporations
| If you are a C corporation or an S corporation then you may be liable for… | Use Form… | Separate Instructions… |
|---|---|---|
| Income Tax | 1120, U.S. Corporation Income Tax Return (PDF) | Instructions for Form 1120 U.S. Corporation Income Tax Return(PDF) |
| Estimated tax | 1120-W, Estimated Tax for Corporations (PDF) | Instructions for Form 1120-W(PDF) |
| Employment taxes:Social security and Medicare taxes and income tax withholdingFederal unemployment (FUTA) tax | 941, Employer’s Quarterly Federal Tax Return (PDF) or943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees)940, Employer’s Annual Federal Unemployment (FUTA) Tax return (PDF) | Instructions for Form 941 (PDF)Instructions for Form 943 (PDF)Instructions for Form 940 (PDF) |
| Excise Taxes | Refer to the Excise Tax Web page |
S Corporations
S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- including individuals, certain trusts, and estates and
- may not include partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
- Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).
In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders. See the instructions for Form 2553 for all required information and to determine where to file the form.
Filing Requirements:
| If you are an S corporation then you may be liable for… | Use Form… | Separate Instructions… |
|---|---|---|
| Income Tax | 1120S (PDF) 1120S Sch. K-1 (PDF) | Instructions for Form 1120S(PDF) Instructions for Form 1120S Sch. K-1 (PDF) |
| Estimated tax | 1120-W (PDF) (corporation only) and 8109 | Instructions for Form 1120-W(PDF) |
| Employment taxes:Social security and Medicare taxes and income tax withholdingFederal unemployment (FUTA) taxDepositing employment taxes | 941 (PDF) ( 943 (PDF) for farm employees)940 (PDF) 8109 | Instructions for Form 941 Employers QUARTERLY Federal Tax Return (PDF)Instructions for Form 943 Employers Annual Federal Tax Return for Agricultural Employees (PDF)Instructions for Form 940 Employers Annual Federal Unemployment (FUTA) Tax Return (PDF) |
| Excise Taxes | Refer to the Excise Tax web page |
| If you are an S corporation shareholder then you may be liable for… | Use Form… | Separate Instructions… |
|---|---|---|
| Income Tax | 1040 and Schedule E (PDF) and other forms referenced on the shareholder’s Schedule K-1 | Instructions for Schedule E (Form 1040)Supplemental Income and Loss (PDF) |
| Estimated tax | 1040-ES (PDF) |
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, and you should check with your state if you are interested in starting a Limited Liability Company.
Owners of an LLC are called members. Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLCs, those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information. There are special rules for foreign LLCs.
Classifications
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.
Effective Date of Election
An LLC that does not want to accept its default federal tax classification, or that wishes to change its classification, uses Form 8832, Entity Classification Election, to elect how it will be classified for federal tax purposes. Generally, an election specifying an LLC’s classification cannot take effect more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date the election is filed. An LLC may be eligible for late election relief in certain circumstances. See Form 8832 General Instructions for more information.