Tax Implications of Different Business Structures

Note: This is not legal or financial advice, and I am not an attorney or an accountant. This is just the notes of someone trying to figure out their new business and its taxes.

  • Every business has two types: a Tax Type and a Legal Type
    • Tax Type is determined by their Legal Type
  • Legal businesses are formed with State Law (not Federal Law)
    • Businesses file within the states they operate in, making who owns the business public
    • Businesses will be listed online with state government as “In Good Standing” or not
    • Every business is required to be able to receive correspondence
    • General rule is that to form a business you have to file paperwork with the state
  • Businesses must maintain a separate business:
    • Keep business accounting records
    • Separate business bank account and use it
    • No co-mingling of funds (no personal expenses from business and vice versa)
    • This protects the business owners' assets and future earnings from having to pay someone if something goes wrong

5 Business Tax Types and their Tax Return

  1. Self-Employed Business - on Schedule C (attached to owner’s Form 1040)
  2. Partnership (“P-Ship”) - Form 1065 with attached Schedule K-1
  • Owners then use info on Schedule K-1 on their own Form 1040
  1. Corporation (C-Corp) - Form 1120
  • Various forms filed for each employee (and owner) so employees get a W-2
  1. S-Corporation (S-Corp) - Form 1120-S
  • Combines aspects of partnership and corporation
  • Includes Schedule K-1s attached to 1120-S
  • Owners use info on Schedule K-1 on their own Form 1040
  1. Charitable Organization - Form 990
  1. Sole Proprietor - created automatically by operating
  • No specific form needs to be filed, but may need to register with the state
  • No separate from the owner, business and owner are the same
  • Taxed as Self-Employed taxpayer
  1. Partnership - formed legally when people work together with the intention to share in profits or losses
  • Nothing needs to be put in writing, can just start
  • Can be formed formally through the state (ex: LLP)
    • Whether they have liability depends on the specific state
  • Most people don’t use a partnership anymore, instead using MMLLC
  • Taxed as a Partnership
  • Business must file before the partners can file their personal returns
  1. Married Couple Owning a Business Together - “Qualified Joint Venture” - election for married couples who don’t want to file a P-Ship
  • File as self-employed with two schedule Cs
  1. Corporation - taxed as a Corporation
  • Hundreds of years old
  1. Single-Member LLC (SMLLC)
  • LLCs were formed because many people were forming corporations but those corporations weren’t holding up in court - became popular across many states over the past 20 or 30 years
  • Provides limited liability protection for owners, but requires fewer moving parts than the corporation
  • Intended for small business
  • No separate tax form - how they are taxed depends on how many members of the LLC there are
  • Default for SMLLC: taxed as Self-Employed with a single Schedule C
  • Best of both worlds: limited liability, but able to take self-employed tax write-offs
  1. Multi-Member LLC (MMLLC)
  • 2 or more members
  • Default for MMLLC: taxed as Partnership
  1. “Non-Profit” Charitable Organization
  • Structured similarly to a corporation
  • No shareholders, just donors


  • S-Corp - S-corp is a tax only type of business
    • Can be elected by SMLLC, MMLLC, P-Ship, C-Corp
    • Must meet the criteria for an S-corp to elect this option
    • Generally for a smaller business, but generally doesn’t save money for self-employed businesses where the owner works in the business
    • With the latest new development in business taxes (20% deduction for next five years), S-Corp is not recommended
    • Note: C-corp can also be elected by LLCs and P-Ship