Tax Filing Default and Options for Different Business Entities

In the United States, the federal tax filing requirements vary depending on the type of business entity. This article gives you a brief overview of tax filing options for the following common types of businesses:

  • Sole proprietorship (no LLC)
  • Single-member LLC
  • Partnership (no LLC)
  • Multi-member LLC
  • C corporation

Sole Proprietorship (No LLC)

A sole proprietorship is an unincorporated business owned and run by one individual.

For tax purposes, the income and expenses of the business are reported on the individual’s personal income tax return, Form 1040, using Schedule C or Schedule C-EZ.

The net income or loss from the business is then combined with the individual’s other income and deductions.

Single-Member LLC

A single-member limited liability company (LLC) is disregarded for federal income tax purposes unless the owner chooses to treat it as a corporation.

By default, a single-member LLC is taxed in the same way as a sole proprietorship. The income and expenses of the LLC are reported on the owner’s personal income tax return, using Schedule C.

But a single-member LLC can choose to be taxed as a C corporation by filing IRS Form 8832 or as an S corporation by filing Form 2553.

Partnership (No LLC)

A partnership is an unincorporated business owned by two or more people. For tax purposes, a partnership does not pay tax on its income. Instead, it “passes through” any profits or losses to its partners.

The partnership must file an annual information return (Form 1065) to report income, deductions, gains, losses, etc. Each partner receives a Schedule K-1 (Form 1065) from the partnership, which partners use to report their share of the partnership’s income or loss on their personal income tax returns.

Multi-Member LLC

By default, a multi-member LLC is treated as a partnership for tax purposes. The LLC must file Form 1065, and each member receives a Schedule K-1 showing their share of the LLC’s income or loss. Each member then reports this income or loss on his or her personal income tax return.

But a multi-member LLC can choose to be taxed as a C corporation by filing Form 8832 or as an S corporation by filing Form 2553.

C Corporation

A C corporation is a legal entity separate from its owners and is subject to corporate income tax. C corporations file Form 1120 to report income, deductions, gains, losses, etc.

Unlike pass-through entities (such as sole proprietorships, partnerships, and S corporations), C corporations are subject to double taxation. This means the corporation pays taxes on its income, and then shareholders also pay taxes on dividends they receive from the corporation.

The C corporation can elect taxation as an S corporation by filing Form 2553.

Handy Reference

Here’s a handy big-picture reference for entity classification:

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