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12.1 Small Business/Self-Employed/Other Business : Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
Can a husband and wife run a business as a sole proprietor or do
they need to be a partnership?
It is possible for either the husband or the wife to be the owner of the
sole proprietor business. The other person could work in the business as an
employee. If the spouses intend to carry on the business together and share
in the profits and losses, then they have formed a partnership. See Rev. Proc.
2002-69 for Special Rules for Spouses in Community States.
References:
Are partners considered employees of a partnership or are they self-employed?
Partners are considered to be self-employed. If you are a member of a partnership
that carries on a trade or business, your distributive share of its income
or loss from that trade or business is net earnings from self-employment.
Limited partners are subject to self-employment tax only on guaranteed payments,
such as salary and professional fees for services rendered.
References:
I recently formed a limited liability company (LLC). The LLC has
no employees. Do I need a separate Federal Tax ID number for the LLC?
No, you will not need a separate Federal Tax ID number for the LLC if you
are the sole owner of the LLC and the LLC has no, employees. If you are not
the sole owner of the LLC or if the LLC has employees, you will need a separate
Federal Tax ID number for the LLC.
References:
- Publication 1635 (PDF), Understanding your EIN
- Employer identification Number - IRS
- Form SS-4 (PDF), Application
for Employer Identification Number
- Form 8832 (PDF), Entity Classification
Election
As a Domestic LLC (limited liability company), what forms do I use
to file a return?
The form you use will depend on what kind of entity your business is for
Federal tax purposes. Following are some general guidelines and the forms
which go with each entity:
If your business has only one owner, it will automatically be considered
to be a sole proprietorship (referred to as an entity to be disregarded as
separate from its owner) unless an election is made to be treated as a corporation.
A sole proprietorship files Form 1040 (PDF), U.S.
Individual Income Tax Return and will include Form 1040, Schedule C (PDF), Profit or Loss from Business, or Form 1040, Schedule C-EZ (PDF) and Form 1040, Schedule SE (PDF) , if net income $400.00. If an election is made to
be treated as a corporation, Form 1120 (PDF), U.S.
Corporation Income Tax Return, is filed.
If your business has two or more owners, it will automatically be considered
to be a partnership unless an election is made to be treated as a corporation.
A partnership files Form 1065 (PDF), U.S.
Partnership Return of Income. If an election is made to be treated as
a corporation, Form 1120 (PDF), U.S. Corporation
Income Tax Return, is filed.
The election referred to is made by filing Form 8832 (PDF), Entity Classification Election.
References:
For IRS purposes, how do I classify a limited liability company?
Is it a sole proprietorship, partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by
filing articles of organization as an LLC. Unlike a partnership, none of the
members of an LLC are personally liable for its debts. An LLC may be classified
for Federal income tax purposes as a sole proprietorship (referred to as an
entity to be disregarded as separate from its owner), partnership or a corporation.
If the LLC has only one owner, it will automatically be considered to be a
sole proprietorship (referred to as an entity to be disregarded as separate
from its owner), unless an election is made to be treated as a corporation.
If the LLC has two or more owners, it will automatically be considered to
be a partnership unless an election is made to be treated as a corporation.
If the LLC does not elect its classification, a default classification of
partnership (multi-member LLC) or sole proprietorship (single member LLC)
will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification ElectionIf a taxpayer does not
file Form 8832 (PDF) , a default classification
will apply.
References:
Must a partnership or corporation file a tax form even though it
had no income for the year?
A domestic partnership must file an income tax form unless it neither receives
gross income nor pays or incurs any amount treated as a deduction or credit
for federal tax purposes.
A domestic corporation must file an income tax form whether it has taxable
income or not.
References:
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your state's requirements,
you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation.
Several requirements must be met before you can elect S corporation status.
Instructions for Form 2553, Election by a Small Business Corporation,
provides the information on these requirements.
References:
I have a C corporation. What is the procedure to change it to an
S corporation?
Once you have established your corporation according to your state's requirement,
to convert from a C corporation to an S corporation, you must meet the same
requirements as a newly formed corporation electing S corporation status.
You must meet the requirements of a "small business corporation" which are,
in general:
Be a domestic corporation organized under the law of any state or U.S.
territory;
Have only individuals, estates or certain trust as shareholders (no partnerships
or corporations as shareholders;
Have only citizens or residents of the United States as shareholders;
Have only one class of stock (differences in voting rights are OK)
The S corporation can have no more than 75 shareholders and must make the
election to be an S corporation on Form 2553 (PDF), Election
by a Small Business Corporation, before the 16th day of the third month
following the close of the C corporation's tax year if the election is to
be effective for the current tax year. The C corporation must qualify as an
eligible corporation during those 2 1/2 months and all shareholders during
those 2 1/2 months must consent, even if they do not own stock at the time
of the election. If the election is filed after the 15th day of the third
month of the tax year, the election will be in effect for the next tax year
and all shareholders at the time of the election must consent. For late elections
that qualify for treatment as timely filed see Rev. Prov. 98-55. S-Corporation
file Form 1120S for the tax year the election takes effect.
References:
What is the procedure for revoking subchapter S election for a corporation?
Voluntary termination of an S election is made by filing a statement with
the Service Center where the original election was properly filed. A revocation
may be made only with the consent of shareholders who, at the time the revocation
is made, hold more than one-half of the number of issued and outstanding shares
of stock (including nonvoting stock) of the corporation. There is specific
information that must be included in the statement and this information is
outlined in Regulations section 1.1362-6(a)(3) and in
Instructions for Form 1120S, U.S. Income Tax Return for an S Corporation.
The revocation may state an effective date as long as it is on or after
the date the revocation is filed. If no date is specified and the revocation
is filed before the 15th day of the third month of the tax year, the revocation
will be effective for the current tax year. If the revocation is filed after
the 15th day of the third month of the tax year, the revocation will be effective
for the next tax year.
You may want to consult the IRS Customer Service phone line at 1-800-829-4933
or you may wish to consult with a tax professional to be certain you have
all the necessary information to file a proper revocation.
The S corporation election terminates automatically under certain conditions.
Refer to
Instructions for Form 1120S, U.S. Income Tax
Return for an S Corporation.
References:
-
Instructions for Form 1120S, U.S. Income
Tax Return for an S Corporation
- Treas. Reg. section 1.1362-6(a)(3)
- Treas. Reg. section 1.1362-2(a)
Can you give me plain English definitions for the following: (1)
a closely held corporation, (2) a personal holding corporation, and (3) a
personal service corporation?
Generally, a closely held corporation is a corporation that, in the last
half of the tax year, has more than 50% of the value of its outstanding stock
owned (directly or indirectly) by 5 or fewer individuals. The definitions
for the terms "directly or indirectly" and "individual" are in Publication 542, Corporations.
Generally, closely held corporations are subject to additional limitations
in the tax treatment of items such as passive activity losses, at-risk rules,
and compensation paid to a corporate officers.
A personal holding company is defined in Internal Revenue Code section
542. Basically, a corporation is a personal holding company if both of the
following requirements are met:
Personal Holding Company Income Test. At least 60% of the corporation's
adjusted ordinary gross income for the tax year is from dividends, interest,
rent, and royalties.
Stock Ownership Requirement. At any time during the last half of the tax
year, more than 50% in value of the corporation's outstanding stock is owned,
directly or indirectly, by 5 or fewer individuals.
Refer to the
Instructions for Form 1120, Schedule PH for
more information and a list of exceptions.
A personal service corporation is a corporation where the main work of
the company is to perform services in the fields of health, law, engineering,
architecture, accounting, actuarial science, the performing arts, or consulting.
Examples may be law firms and medical clinics. Also, substantially all of
the stock is owned by employees, retired employees, or their estates.
References:
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