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Sole Proprietorship
This is the simplest, most basic way to own a business — one person owning an unincorporated business. From a tax point of view, your filing requirements don't differ much from when you were a standard 9-to-5 employee. You will file the usual Form 1040 and Schedule C or C-EZ to report any profit or loss. You have to pay Social Security payments and make estimated tax payments; however, there are no special forms needed to set yourself up as a sole proprietor.
Partnership
This form is for two or more individuals owning a business. According to the IRS, a partnership is where "each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business." Your relationship with the IRS now becomes more complex than if you were a sole proprietor. The partnership itself has to file Form 1065, U.S. Return of Partnership Income, among other forms, and that means the complex Schedule K-1 for each partner. The Form 1040, including Schedule E, is also required for each partner.
S Corporation
These entities pass corporate income, losses, deductions and credits through to their shareholders for Federal tax purposes. This allows S corporations to avoid double taxation on the corporate income. It can be a sweet deal, but not every company can be an S corporation. Only domestic corporations with a maximum of 100 shareholders are eligible, and these owners must be individuals or certain trusts and estates. There are other limitations too. The corporation has to file Form 1120S, U.S. Income Tax Return for an S Corporation, and there are other requirements as well.
Limited Liability Company
These are especially complicated, because although they are recognized by the IRS, each state has authority to regulate them. Most, but not all, kinds of companies can form an LLC. This form of organization offers "limited liability" even though an LLC is not technically a corporation. Owners of an LLC are called members.
The IRS will treat an LLC as a corporation, a partnership or as part of the LLC's owner's tax return, based on how the members handle their filings. For example, according to the IRS, 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. If an LLC has just one member, it's 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.
So, what's the most advantageous form for your business? It Depends - So please give us a call and we'll explain your options in more detail.
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