As mentioned earlier, a single member LLC can be a Sole proprietorship, a S-Corporation or even a C-Corporation. You make this determination at the state level, if they require it or at the Federal level when you apply for an EIN (Employer Identification Number). If you do not specify how you want your LLC to be treated tax-wise (as a sole proprietorship for example), the IRS will make that determination for you under the default rules mentioned above. Although this wouldn’t be terrible, why take the chance? As an entrepreneur and business owner, you have the opportunity to be strategic and to make the determination yourself. Be entrepreneurial!
Another consideration of business structure is how much reporting is required.
A Sole Proprietorship is definitely the easiest: Complete a Schedule C and file it with your personal tax return (Form 1040). If you have organized and complete records, you may be able to do this yourself with a little research, but the guidance of an experienced tax professional will help you avoid potential tax pitfalls by reporting all income appropriately and taking all allowable deductions. Believe it or not, for a number of reasons, the IRS requires tax payers to claim all allowable deductions (just as they do all income).
A Partnership completes Form 1065, which then requires completion of a Schedule K-1. The K-1 information is entered in your personal income tax return (the “pass-through” aspect) on line 17 on Form 1040. Partnerships are more complex and usually require the guidance of legal, accounting, and tax professionals.
An S-Corporation completes Form 1120S, which requires completion of a K-1 and, again, that information is entered on line 17 on Form 1040. As with a Partnership, this business structure usually benefits from the guidance of legal, accounting, and tax professionals.
To complete the picture, a C-Corporation has the more extensive reporting requirements and reports income and expenses, and pays taxes on Form 1120. If a C-Corporation is profitable, owners receive benefits via dividends and wages for which Forms 1099-B and W-2 are issued by the Corporation and then reported on personal tax returns.
There numerous tax and legal issues to consider when choosing and setting up a business structure. Many are beyond the scope of this article, and it is good business sense to have a professional team (attorney, accountant, tax professional) guide you in these important decisions.
Raymond Davidov
Block Advisors – Tax Advisor, Office Manager
113 1st Ave. N., Seattle, WA 98109
Office: 206.441.1040| Fax: 206.448.8629
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