Business Tax Overview

Sole Proprietor

Since a sole proprietor is one individual doing business and not an entity structure the taxes are fairly simple. The profits and losses of the business are reported with the individual’s personal income tax return. The individual will use Schedule C” to report profits and losses from the business and file this along with Form 1040. Along with filing the business tax, sole proprietors need to pay self-employment taxes and since they are self-employed they need to pay the full 15.3% (typically when a person is employed by a company the individual pays half their self-employment take and the company pays the other half). Schedule SE is the form required for self-employment tax calculation.

Partnerships

Like a sole proprietor, partnership taxes are rather easy. The partnership itself does not pay taxes. The profits and losses of the business are reported by the partners as part of their personal tax returns. Although the partnership does not pay the tax, it is still required to file a tax return unless the partnership has no income or expenses. The partnership taxes are prepared on Form 1065. The filing deadline for partnership tax returns is April 15. Within form 1065 there is a section called Schedule K. This shows each partners percentage of profits and losses of the partnership. Each partner is issued a K-1 with their respective percentage to report with their personal income tax returns. One major benefit of partnership taxation is the ability to allocate income and losses as the partners see fit. For example, if a partnership is owned 50/50 they can choose to allocate 90 percent of the profit to one partner and 10 percent to the other.

Corporation

Corporate taxes can be much more complex than sole proprietor and partnerships. Since a corporation is a separate legal entity from shareholders, the corporation needs to file a tax return. The corporation will file Form 1120 to complete the corporate tax return which is due by March 15th each year. The profits and losses of the business will be reported and the corporation will pay taxes based on their income. One of the downfalls of a corporation is double taxation. The corporation is taxed on income and then any remaining profits after tax distributed to shareholders are taxed as well. Companies looking to avoid the double taxation of a corporation can elect S-Corp status with the IRS.

S-Corporation

Contrary to popular belief an S-Corp is not type of entity, it is a tax election. A corporation wishing to avoid double taxation can elect S-Corp status with the IRS. With an S-Corp election the profits and losses pass through the business to the shareholders to report with their personal income tax returns. When the business files their tax return, the profits are allocated to the shareholder based on their percentage of ownership on a K-1 form. Each shareholder is given a copy of their respective K-1 to submit when filing their personal return. In order to elect S-Corp status the following requirements must be met:

1. The business can have no more than 100 shareholders
2. Shareholders must be individuals, estates, certain trusts and certain exempt organizations
3. Shareholders must be US citizens or residents
4. All shareholders must consent to the election
5. The business can only have one class of stock
6. Profits and losses must be allocated according to each owners interest in the business

To elect S-Corp status, the corporation will need to file Form 2553 with the IRS.

Limited Liability Company (LLC)

One of the many advantages of an LLC is the tax flexibility. An LLC has the option to file taxes as a partnership, s-corporation or c-corporation. How the business files taxes is best decided by an accountant or tax professional.