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Tax FAQ:

Business Structures & Entities

Our Business Structures & Entities resources explain entity classifications, pass-through taxation, shareholders, and business tax considerations.

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Business Structures & Entities

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A C corporation is a business entity that is generally treated as a separate taxpayer from its owners for federal income tax purposes.

A C corporation generally pays income tax on its taxable income at the corporate level. Shareholders may also have tax consequences when the corporation distributes certain amounts to them.

Yes. A corporation is generally a separate legal and tax entity from its shareholders.

A shareholder is an individual or entity that owns stock in a corporation.

Yes. A C corporation can generally have multiple shareholders and different classes of stock, subject to applicable corporate and tax rules.

Yes. A C corporation can have a single shareholder.

Double taxation generally refers to income being taxed first at the corporate level and then certain corporate distributions, such as dividends, being taxed to shareholders.

Generally, a C corporation may deduct qualifying ordinary and necessary business expenses, subject to applicable limitations and tax rules.

Generally, yes. A domestic C corporation generally has a federal income tax filing obligation.

No. The appropriate business structure depends on factors such as ownership, liability considerations, tax treatment, financing, and the long-term goals of the business.

A disregarded entity is generally a business entity that is not treated as separate from its owner for certain federal income tax purposes.

A single-member LLC that has not elected to be taxed as a corporation is commonly treated as a disregarded entity for federal income tax purposes.

It can be. An entity may be legally separate under state law while being disregarded as separate for certain federal tax purposes.

Generally, its business activity is reported on the owner’s federal tax return rather than on a separate federal income tax return for the entity itself.

No. Disregarded status concerns how the entity is treated for tax reporting. The underlying business income may still be subject to applicable taxes.

Yes. A disregarded entity can have employees and may have separate employment tax responsibilities.

Yes. Maintaining a separate business bank account can be important for accounting, recordkeeping, and maintaining separation between business and personal finances.

Certain eligible entities may elect to be treated as a corporation for federal tax purposes.

It can. Changes in ownership may change the entity’s federal tax classification.

Understanding the classification helps determine how business income, expenses, employment taxes, and other tax matters should be reported.

A joint venture is generally a business arrangement in which two or more parties work together on a business activity or project and share economic interests.

The tax treatment depends on how the arrangement is structured and classified for federal and state tax purposes.

No. The tax classification depends on the facts, legal structure, and elections that apply to the arrangement.

Yes. Individuals can participate in joint ventures when they agree to conduct a business activity together.

Yes. Corporations, LLCs, partnerships, and other entities can potentially participate in joint ventures.

The parties generally establish how profits, losses, expenses, responsibilities, and other economic interests will be allocated under their agreement and applicable law.

Expenses should generally be properly documented and allocated according to the arrangement and applicable tax rules.

Yes. Depending on its structure, a joint venture may create federal, state, local, employment, or information-reporting obligations.

Participants should generally maintain agreements, financial records, invoices, receipts, contribution records, distributions, and documentation supporting income and expenses.

Proper structuring can help clarify ownership, responsibilities, profit and loss allocations, tax reporting, and the rights and obligations of the participants.

A limited liability company, or LLC, is a business entity created under state law that can provide liability protection to its owners and can have different federal tax classifications.

An LLC may be taxed differently depending on the number of owners, elections made by the LLC, and its applicable federal tax classification.

Yes. A single-member LLC can have one owner.

Yes. A multi-member LLC can have two or more owners, commonly referred to as members.

An LLC member is an owner of the LLC.

Certain LLCs can elect corporate tax treatment if they meet applicable requirements.

No. Forming an LLC does not automatically eliminate federal, state, or local tax obligations.

Generally, qualifying business expenses may be deductible depending on the LLC’s tax classification and applicable tax rules.

No. Liability protection has limitations and can depend on state law, the circumstances involved, and how the business is operated.

No. The best structure depends on the business’s circumstances, ownership, tax considerations, liability concerns, and long-term objectives.

A partnership is generally a business arrangement in which two or more persons or entities carry on a business together.

A partnership generally reports its income, deductions, gains, losses, and other tax information and passes applicable items through to its partners.

Generally, a partnership is not subject to federal income tax in the same manner as a C corporation. Taxable items generally pass through to the partners, although special taxes and circumstances can apply.

The owners are generally called partners.

Yes. A partnership can generally have multiple partners.

Profits and losses are generally allocated according to the partnership agreement and applicable tax rules.

Generally, qualifying business expenses can be taken into account when determining partnership income, subject to applicable rules and limitations.

Generally, yes. Partnerships generally have information-reporting requirements even though income may pass through to the partners.

A distribution may have tax consequences depending on the partner’s basis, the amount distributed, and other circumstances.

A partnership agreement can establish ownership interests, responsibilities, profit and loss allocations, contributions, distributions, and procedures for handling changes among the partners.

A pass-through entity is generally a business structure in which certain business income, deductions, gains, losses, or credits are passed through to the owners rather than being taxed solely at the entity level.

Common examples can include partnerships, S corporations, and certain LLCs and other eligible entities.

No. The income may generally be taxed to the owners even when the entity itself is not subject to federal income tax in the same manner as a C corporation.

The income is generally reported to the owners through the appropriate tax reporting process and included on their individual or entity-level tax returns as applicable.

Yes. Qualifying business expenses generally reduce the income that passes through to the owners, subject to applicable rules.

Potentially. The treatment depends on the entity type, the owner’s role, and the nature of the income.

Yes. Pass-through businesses can have employees and may have employment tax obligations.

Yes. Partnerships and certain other pass-through entities can have multiple owners.

Potentially. State tax treatment can differ from federal treatment and varies by jurisdiction.

Pass-through taxation can significantly affect how business income is reported and taxed by the owners and should be considered when selecting or evaluating a business structure.

An S corporation is generally a corporation or eligible entity that has elected to be treated under the federal tax rules applicable to S corporations.

Certain income, deductions, gains, and losses generally pass through to the shareholders rather than being taxed at the corporate level in the same manner as a C corporation.

Certain eligible LLCs can elect to be treated as an S corporation for federal tax purposes.

An S corporation is owned by shareholders.

Yes. S corporations are subject to specific shareholder and ownership requirements.

Yes. An S corporation can have employees and has employment tax responsibilities.

Yes. Shareholders who provide services to an S corporation generally must comply with applicable compensation and payroll tax requirements.

Yes. An S corporation generally has an annual federal tax filing and provides applicable information to its shareholders.

Generally, qualifying business expenses may be deducted when determining the corporation’s income, subject to applicable limitations.

No. S corporation status has eligibility requirements and tax consequences that should be evaluated based on the business’s circumstances.

A shareholder is an individual or entity that owns shares of stock in a corporation.

Yes. Shareholders can own a portion of a corporation based on the shares they hold.

Yes. A corporation can have a single shareholder.

Yes. Depending on the corporation’s structure and circumstances, shareholders may receive distributions.

No. The tax treatment depends on the type of distribution, the shareholder’s basis, the corporation’s tax classification, and other applicable rules.

Shareholder basis is generally the shareholder’s tax investment in corporate stock and is important for determining the tax consequences of certain transactions involving the stock.

Yes. Shareholders can generally sell their stock, although the transaction may create tax consequences.

Yes. A shareholder may make a loan to a corporation, but the transaction should be properly documented and structured.

Yes. A shareholder may also be an employee, officer, or other service provider of the corporation.

Accurate records help establish ownership, stock basis, contributions, distributions, loans, and other transactions that may affect the shareholder’s tax obligations.

A sole proprietorship is a business owned and operated by one individual who has not established a separate legal business entity for the activity.

Business income and expenses are generally reported by the owner on the owner’s individual federal tax return using the appropriate business tax schedules.

Generally, the owner’s taxable business profit is included in the owner’s tax return and may be subject to applicable income and self-employment taxes.

Generally, qualifying ordinary and necessary business expenses may be deductible, subject to applicable rules and limitations.

Yes. A sole proprietor can have employees and must comply with applicable employment tax requirements.

Yes. A sole proprietor may operate under a trade or business name, subject to applicable state and local requirements.

Generally, no. Unlike a corporation or LLC, a sole proprietorship generally does not create a separate legal entity from its owner.

Yes. Maintaining a separate business account can make it easier to track business income and expenses and maintain accurate records.

Records should generally document business income, expenses, assets, mileage when applicable, invoices, receipts, bank transactions, and other information supporting the tax return.

No. While a sole proprietorship can be simple to establish, the owner should consider liability, tax treatment, administrative requirements, and future business plans before selecting a structure.

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