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Sole proprietorships are reported as self-employment income on a Schedule C as part of your individual Federal Tax Return. Net income from sole-proprietorships is subject to self-employment tax in addition to income tax.
Partnerships are reported on a Form 1065, U.S. Return of Partnership Income. However, they are conduit entities that are not taxed at the entity level. Instead, the income “flows-through” to the individual owners, via a K-1, and is taxed on their personal returns, at graduated tax rates.
Limited Liability Companies
Limited Liability Companies are allowed by state statute and are not recognized by the IRS as a separate taxable entity. Instead, the IRS has default classifications for LLCs depending on the number of owners in the LLC. If the LLC has a single owner- commonly called a single-member LLC- the IRS considers the LLC a “disregarded entity.” Disregarded entities are reported on the single member’s personal income tax return, as if it was a sole-proprietorship. If an LLCs has two or more owners- a multi-member LLC- the IRS classifies the LLC as a partnership for income tax purposes. An LLC can also elect to be taxed as a Corporation.
S Corporations are reported on a Form 1120S, U.S. Income Tax Return for an S Corporation. S Corporations are conduit entities that are not taxed at the entity level. Instead, the income “flows-through” to the individual owners, via a K-1, and is taxed on their personal returns, at graduated rates.
Corporations are the only business entities that are separate taxable entities. Corporations file Form 1120, U.S. Corporation Income Tax Return and pay tax on earnings at the flat rate of 21%.
Contact us today if you have questions or need assistance with your business taxes.