When you file your taxes at the end of the year, you can file a sole proprietorship on a Schedule C, a C Corporation on a Form 1120, an S Corporation on a Form 1120S or a partnership on a Form 1065. There is no tax form for an LLC. If your business is registered as an LLC, you would have to file an election with the IRS to be considered as either a C corporation or a partnership. If you elected to be taxed as a corporation, the default is C Corporation.
If you then decided you want to be an S Corp, you then have to file another election to be taxed as an S Corp.
The choice of entity depends on your circumstances and business needs. A sole proprietor or single member LLC can file business information on a Schedule C which is part of the 1040 series. In that case, the LLC is viewed by the IRS as a disregarded entity (the LLC designation is disregarded in the tax filing).
If you have two or more people in your business, you’re not going to be able to file on a Schedule C (except in very special circumstances). You’re going to have to elect either a corporation (S or C) or a partnership.
We can help you decide which entity is best for your business. Here’s a very short list of why a business might choose a particular entity:
-Partnerships are generally well understood by business members and generally easy to manage, especially if there is a partnership agreement.
-S Corps are often the entity of choice when a successful business results in higher self-employment taxes for the owner(s).
-C Corporations might be formed when profits exceed a certain level or fringe benefits become desirable and affordable.
So that’s a lot to consider but here’s the good news. Most people starting out will file their taxes on a Schedule C and Schedule C’s are the easiest tax form there is.
As success comes, you’ll need to change your business entity and your taxes will be a bit more complicated, but that’s a nice problem to have.
Determining the proper entity is beyond the scope of this article but I hope it is something that you someday have to think about as it usually (but not necessarily) results from business growth.
When you’re ready to change, we can help. Changing to a different entity can be as easy as filing a form. but it’s easy to mess up and can result in stiff penalties as complications arise and snowball due any disagreement between you and the IRS as to what your business entity actually is.
For right now, get your business up and running.