How are the different legal forms of business taxed?
If you aren't sure how different legal forms of business organization are taxed, this article will provide the answers. Most of these business forms pay taxes on the personal tax returns of the owners. This process is called "pass-through" taxes.
- Sole Proprietorship
Sole proprietorships are operated by an individual under his or her own name. A sole proprietorship is taxed through the individual's personal tax return (Form 1040), and the profit is determined using a Schedule C.
- Limited Liability Company (LLC)
First, it should be noted that a Limited Liability Company is not a taxing entity. The tax form for an LLC depends on whether the LLC is a single-member or multiple-member entity.
- Single-Member LLC
A single-member LLC is taxed in the same way as a sole proprietorship, through the member's personal tax return, and using the Schedule C.
- Multiple-Member LLC
An LLC with two or more members is taxed like a partnership, with an information return filed for the partnership (on a Form 1065) and each member receiving a Form K-1 to show profits/losses of his or her share, on the personal income tax return.
- Single-Member LLC
- Partnership
Partnerships file an information return on Form 1065. This form shows the ownership share of individual partners and their share of the profits and losses of the partnership for the tax year. Individual partners receive a Schedule K-1 which shows their share of the profits/losses. This schedule is included with each partner's individual tax return, and the profit or loss is included in the taxable income for that partner.
- Corporations
A corporation files its taxes as a separate entity, on Form 1120. A subchapter-s corporation uses Form 1120S to report its taxes.
As a final note, a business owner who is a shareholder of a corporation is subject to double taxation, with his/her income as an employee taxed, as well as distributions in the form of dividends.
