- The Internal Revenue Service requires each member of a business partnership to pay taxes on the profits of a business as income using IRS Form 1040. Each partnership member usually receives a differing amount of business profits depending on the details of the company's partnership agreement and each partner's original investment in the business. For example, a 15 percent owner of the partnership usually receives 15 percent of the business's profits. The IRS allows a business partnership to change its partnership agreement at the close of each tax year. This allows for changes in ownership percentages and new profit distributions.
- At the state level, a limited liability company (LLC) has the same tax rules as a business partnership. The IRS does not officially recognize a limited liability company as a type of taxable entity and allows the company owners to choose taxation as a partnership, sole proprietorship or corporation. If the company has multiple owners, the LLC can only choose taxation as a partnership or corporation. This gives an LLC the versatility of declaring proportional business profits as income at the state level and enjoying corporate limited liability protection at the federal level.
- A C corporation is an entirely separate entity for tax purposes from its creators and shareholders. The corporation files its own tax return declaring its own profits, losses and deductions. The owners of the corporation do not pay taxes on the corporation's profits unless owners receive these profits through dividends based on stock ownership. Stock owners must pay a capital gains tax on the profit gained from owning stock in the corporation over the year. Creditors of the corporation cannot legally pursue shareholders or creators of the corporation for payment of business debts.
- An S corporation is a smaller form of corporation with a limited number of stock and rules for who may invest in the company. Unlike a C corporation, an S corporation passes its profits, losses and deductions through to its shareholders for tax purposes. This allows an S corporation to avoid double taxation of profits at the corporate level and then again as capital gains at the shareholder level. Owners of the corporation are responsible for paying the business's taxes, though limited liability still exists to protect personal assets from corporate creditors.
- Advertisement -
- Advertisement -