What type of entity is my business?

by TurboTax•180• Updated about 16 hours ago

The tax return your business needs to file depends on your business's legal structure. Different business structures have different tax and reporting requirements. Here's a breakdown of common business types and the typical tax returns they’re required to file.

Partnership

A partnership is a business owned by two or more people or entities. Each partner typically invests money, property, labor, or skills, and shares in the business's profits and losses. A limited liability company (LLC) with more than one owner is usually treated as a partnership.

Tax Form 1065

Every domestic partnership must file Form 1065, unless it doesn’t receive income or have deductions or credits for federal income tax purposes. There are a few exceptions for foreign partnerships and Qualified Derivative Dealers, however LLCs that are partnerships have the same filing requirements.

See Instructions for Form 1065: Who Must File on the IRS website for more details.

C-corporation

C corporations are formed under state law and operate according to specific regulations. They pay out earnings to shareholders and are legally responsible for their own debts.

C corporations file their own federal and state tax returns, and are taxed twice. First, they are taxed at the corporate level at corporate tax rates. Second, shareholders pay personal income tax on the dividends they receive from the company.

Tax Form 1120

Every domestic corporation must file an income tax return whether or not they have taxable income, unless exempt under section 501. Domestic corporations file Form 1120, unless they're required or choose to file a special return.

See Instructions for Form 1120: Who Must File on the IRS website for more details.

S corporation

Income and deductions from an S corporation “pass-through” to each shareholder to be reported on their personal income tax returns. An S corporation must operate as a domestic corporation, have only one class of stock, and have no more than 100 shareholders, all of whom must be U.S. citizens or residents. You must file Form 2553 to elect S-corp treatment by the IRS. An LLC can also elect to be treated as an S corporation for tax purposes.

Tax Form 1120-S

A business entity must file Form 1120-S if it filed Form 2553 to elect to be an S corporation, the IRS accepted the election, and the election is currently in effect.

See Instructions for Form 1120-S: Who Must File on the IRS website for more details.

Sole Proprietorship

If you're the only owner of your business, it's a sole proprietorship and you’ll report your business income and expenses on your personal return. The IRS also treats single-member LLCs as sole proprietorships by default, so you'll still file on your personal return unless you elect to be taxed as an S corporation or C corporation.

Tax Form 1040 Schedule C

Use Schedule C (Form 1040) to report income or loss from your sole proprietorship. To qualify as a business, your primary goal must be to regularly and consistently generate a profit.

While the IRS has no definitive requirements for filing Schedule C, you would generally file your first Schedule C for the year when your business begins and continue to file it each year the business remains active.

You're generally "in business" when you start working toward your business goals. That's often seen as when you're ready to sell or offer services, even if you haven't made any money yet. If you have expenses during the year, you'll still need to file Schedule C, even if you didn't earn anything.

Form 1040 Schedule C can be prepared using TurboTax Online Premium and TurboTax Desktop.

See Instructions for Schedule C on the IRS website for more details.

Is the business an LLC?

With an LLC, you have flexibility in how the IRS taxes your business. There aren't specific tax rules for LLCs, however, the IRS lets an LLC decide to be governed by partnership, corporate (C-corp or S-corp), or sole proprietorship tax rules.Your choice affects the tax rules you'll follow.

How can I confirm my business entity?

If this is your first year filing taxes for your business, here are a few questions that can help you identify how your business is set up:

Are you the sole owner of an LLC? If you didn’t elect to be taxed as a corporation, you have a Sole Proprietorship.
Does your business have more than one owner? Did you forego electing to be taxed as a corporation? Your business is set up as a Partnership.
Did you file a Form 2553 with the IRS to turn a C-corp or LLC into an S-corp? If so, your business is set up as an S-corp.
What classification did you select when you created your EIN? Reviewing your EIN application form will reveal how the business is set up.

If this isn't your first time filing and the business classification hasn't changed, use last year's tax return:

Form 1040 with Schedule C for Sole Proprietorships
Form 1120 ‌for C corporations
Form 1120-S ‌for S corporations
Form 1065 ‌for Partnerships

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