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:
1040, U.S. Individual Income Tax Return
or 1040-SR, U.S. Tax Return for Seniors
and Schedule C (Form 1040 or 1040-SR), Profit or Loss from Business
Self-employment tax Schedule SE (Form 1040 or 1040-SR), Self-Employment Tax
Estimated tax 1040-ES, Estimated Tax for Individuals
Social Security and Medicare taxes and income tax withholding
941, Employer's Quarterly Federal Tax Return
943, Employer's Annual Federal Tax Return for Agricultural Employees
944, Employer's Annual Federal Tax Return
Providing information on Social Security and Medicare taxes and income tax withholding
W-2, Wage and Tax Statement (to employee)
and W-3, Transmittal of Wage and Tax Statements (to the Social Security Administration)
Federal unemployment (FUTA) tax 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
Filing information returns for payments to nonemployees and transactions with other persons See Information Return
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 e-file for Business and Self-Employed Taxpayers.
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
May be individuals, certain trusts, and estates and
May not be 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 signed by all the shareholders. See the Instructions for Form 2553PDF for all required information and to determine where to file the form.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations, 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, 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.
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.
For income tax purposes, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation. However, for purposes of employment tax and certain excise taxes, an LLC with only one member is still considered a separate entity.
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 ElectionPDF, 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 About Form 8832,
What Is a Legal Structure?
A legal structure is an organizational framework for how a business entity operates. Also called a business structure, a business form, or a business ownership structure, the proper legal structure depends on the size and type of your business and your business goals.
Typical business legal structures include sole proprietorships, limited liability companies (LLCs), partnerships (such as LLPs), and corporations.
How Do I Choose the Right Legal Structure?
Different legal structures come with distinct advantages and disadvantages. In most cases, the criteria you will evaluate to select the right format involve the following: owner liability expenses and procedures needed to create and run the business structure
how the business will be taxed and investment needs