LLC, Sole Proprietor, S-Corp, Partnership: What’s the Difference?

[KarenL]

Creating a Limited Liability Company (LLC) is a common first step when starting a business, and there are good reasons. It’s a legal entity that potentially offers liability protection, but it’s usually easier and less costly to create than a corporation (for example). The confusion comes with the taxation of the LLC. Simply put, the LLC itself is not taxable. How the LLC is taxed depends on how many members it has and any “election” it’s made regarding taxation.

Single-member vs. Muli-member LLC

A single-member LLC (SMLLC) is considered a disregarded entity for tax purposes. Your income and expenses are reported on your individual income tax return (Form 1040) as a sole proprietor (Schedule C). A multi-member LLC (MMLLC) is also disregarded and defaults to a Partnership (Form 1065). (There are exceptions in community property states if there are only two members and they are married.)

S-Corporation Intro

If your income supports it, you can choose to be taxed as a corporation, then elect to be taxed as an S-Corporation (Form 1120-S). Doing this has tax advantages, but also payroll and other requirements. For both Partnership and S-Corp tax returns, a Schedule K-1 is issued with the net income/expense that should be reported on your individual income tax.

Resources for LLCs, Partnerships, and S-Corporations:

• What type of entity is my business? - Great overview of them all!
• Limited Liability Company Taxes - Reasons why you might form an LLC and how to get started.
• LLC Tax Filing Rules - A simple overview of how tax filing works for businesses formed as an LLC.
• I Own Several Businesses, How Should I File Taxes? - An overview of how business taxes work.
• Partnership Taxes: A Guide for Beginners - Nicely done resource for an intro to Partnerships.
• S-Corp Taxes: An Introductory Guide - An S-Corp (plus more) guide - worth the read!
• Can I Convert My LLC to an S-Corp When Filing My Tax Return? - Start here if considering the S-Corp election.

If you need tax advice or have questions that aren't answered in the links above, please ask in our Taxes forum that best fits your needs!