This overview provides some basic information on business form and federal taxation. It's important to understand that each type of business structure carries different tax implications and options. For example, a limited liability company may choose to be treated as a corporation for tax purposes because it provides advantages in terms of deductions that a partnership tax status does not. Meanwhile, federal taxes for a sole proprietorship are included in the owner's personal income taxes; however, sole proprietorships have their own limits.

This list should help you understand the basics and prepare you for a meeting with your attorney who is equipped to help you decide what business form is best suited to your personal tax situation:

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Sole Proprietorship

• Entity: Not an entity separate from the owner, so no separate tax return.
• Filing: Owner includes the operations of the sole proprietor-ship on his/her individual tax return.
• Federal Employer Tax Number: If a sole proprietor has employees, then a tax number is required.
• Multiple Owners: No. If the business has multiple owners it is no longer a sole proprietor-ship.
• Taxable Year: Generally, the same as the owner's, which is usually a calendar year.

Partnership

• Entity: Not separate taxable entity, but must file an information tax return.
• Filing: Partners include their share of the income, gain, loss, deductions, and credits of the partnership on their personal tax return.
• Federal Employer Tax Number: Required.
• Multiple Owners: Requires two or more people who carry on a business for profit.
• Taxable Year: If all partners do not have the same taxable year, the partnership will have to adopt the taxable year of majority interest or a calendar year if there is no majority interest.

S Corporation

• Entity: Treated as a partnership for tax purposes but may not have more than 75 shareholders
• Filing: Shareholders include their share of the income, gain, loss, deductions, and credits of the corporation on their personal tax return.
• Federal Employer Tax Number: Required.
• Multiple Owners: Usually more than one shareholder. No more than 75 shareholders, who must be individuals, or the IRS will not treat corporation as a partnership for tax purposes.
• Taxable Year: Can usually choose its taxable year

C Corporation

• Entity: A taxable entity separate from its shareholders that may have an unlimited number of shareholders
• Filing: Corporation must file and pay taxes at the corporate level; the shareholders must pay taxes on the distributions they receive.
• Federal Employer Tax Number: Required.
• Multiple Owners: Usually more than one shareholder.
• Taxable Year: Can usually choose its taxable year.

Limited Liability Company

• Entity: Not always a separate taxable entity, but must file an information tax return.
• Filing: Depending on its election, may choose to be taxed as a partnership or a corporation.
• Federal Employer Tax Number: Required.
• Multiple Owners: No. Every state except Massachusetts allows single member LLC.
• Taxable Year: If members do not all have the same taxable year, the LLC must adopt the taxable year of majority interest or a calendar year if there is no majority interest.

Get a Lawyer's Opinion About the Right Business Form for Your Company

Ultimately, the choice is yours. But sometimes it's best to get advice and clarity from a legal professional before choosing something as important as a legal structure for your business. There are several considerations to make before deciding, including how your business will pay federal taxes. Talk to a business and commercial law attorney in your area to get started.

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