James D. Lynch
Business Structure and Tax Returns
The type of business structure determines which income tax return a business needs to file. The most common business structures are:
● Sole proprietorship: A sole proprietorship is an unincorporated business owned by an individual. There is no distinction between the taxpayer and their business. As a result, a sole proprietor reports business income and expenses on Schedule C of the sole proprietor’s personal tax return (Form 1040).
● Partnership: A partnership is an unincorporated business with ownership shared between two or more people. A partnership must file an annual information return (Form 1065) to report income and expenses, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners.
● C Corporation: A standard corporation (also known as a “C” corporation) is a legal entity that is separate and distinct from its owners. It must file a Corporation Income Tax Return (Form 1120) to report income and expenses of the corporation. The corporation pays taxes on its profits, and the shareholders must also report their dividends on their personal tax returns.
● S Corporation: An “S” corporation elects to pass corporate profits or losses through to its shareholders. An S corporation files Form 1120S. Like a partnership, an S corporation does not pay tax. The income flows through to the shareholders, who report their share of the income on their personal tax returns, regardless of whether the income was distributed or re-invested in the company.
● Limited Liability Company: A Limited Liability Company (LLC) is a business structure allowed by state statutes. Since they are created by state law, the IRS does not recognize the LLC business structure. By default, the IRS considers an LLC to be a sole proprietorship if there is one owner or a partnership if there is more than one owner, unless the LLC elects to be treated as a corporation.