Jun
29

Business Structures for Small Business

Business Structures

When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. Legal and tax considerations enter into selecting a business structure.

* Sole Proprietorships

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:
Income Tax	1040, U.S. Individual Income Tax Return (PDF) and Schedule C (Form 1040), Pofit or Loss from Business(PDF) or Schedule C-EZ (Form 1040), Net Profit from Business (PDF)
Self-employment tax	Schedule SE (Form 1040), Self-Employment Tax (PDF)
Estimated tax	1040-ES, Estimated Tax for Individuals (PDF)
Social security and Medicare taxes and income tax withholding	941, Employer’s Quarterly Federal Tax Return (PDF) 943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) 944, Employer’s Annual Federal Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF) (to make deposits)
Providing information on social security and Medicare taxes and income tax withholding	W-2, Wage and Tax Statement (PDF) (to employee) and W-3, Transmittal of Wage and Tax Statements (PDF) (to the Social Security Administration)
Federal unemployment (FUTA) tax	940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF) (to make deposits)
Filing information returns for payments to nonemployees and transactions with other persons	See Information Returns
Excise Taxes	Refer to the Excise Tax web page

* Partnerships

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it “passes through” any profits or losses to its partners. Each partner includes his or her share of the partnership’s income or loss on his or her tax return.

Partners are not employees and should not be issued a Form W-2. The partnership must furnish copies of Schedule K-1 (Form 1065) to the partners by the date Form 1065 is required to be filed, including extensions.

If you are a partnership or a partner (individual) in a partnership, use the information in the charts below to help you determine some of the forms that you may be required to file.

Chart 1 (Partnership)

If you are a partnership then you may be liable for…

Use Form…

Annual return of income

1065,U.S. Return of Partnership Income (PDF)

Employment taxes:

Social security and Medicare taxes and income tax withholding
Federal unemployment (FUTA) tax
Depositing employment taxes

941, Employer’s Quarterly Federal Tax Return (PDF) and 943, Employer’s Annual Federal Tax Return for Agricultural Employees (for farm employees) (PDF)

940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF)
8109-B, Federal Tax Deposit Coupon (PDF)

* Corporations

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, 2006. For more e-file information, see References/Related Topic listed below.

If you are a C corporation or an S corporation then you may be liable for…	Use Form…
Income Tax	1120, U.S. Corporation Income Tax Return (PDF)
Estimated tax	1120-W, Estimated Tax for Corporations (PDF) and 8109-B, Federal Tax Deposit Coupon (PDF)
Employment taxes: Social security and Medicare taxes and income tax withholding Federal unemployment (FUTA) tax Depositing employment taxes	941, Employer’s Quarterly Federal Tax Return (PDF) or 943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees) 940, Employer’s Annual Federal Unemployment (FUTA) Tax return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF)

* S Corporations

An eligible domestic corporation can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S corporation. Generally, an S corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss.

If you are an S corporation use the information in the charts below to help you determine some of the forms that you may be required to file.

Chart 1 – S Corporation

If you are an S corporation then you may be liable for…	Use Form…
Income Tax	1120S, U.S. Income tax Return for an S Corporation (PDF)
Estimated tax	Refer to the EFTPS web page and 8109-B, Federal Tax Deposit Coupon (PDF)
Employment taxes: Social security and Medicare taxes and income tax withholding Federal unemployment (FUTA) tax Depositing employment taxes	941, Employer’s Quarterly Federal Tax Return (PDF) or 943, Employer’s Annual Federal Tax Return for Agricultural Employees (PDF) (for farm employees) 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return (PDF) 8109-B, Federal Tax Deposit Coupon (PDF)

* Limited Liability Company (LLC)

A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute.

LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members. Since most states do not restrict ownership, 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.

For more information, visit the

Small Business and Self-Employed Tax Center

http://www.irs.gov/businesses/small/