12.1 Small Business/Self-Employed/Other Business: Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation
It is possible for either the husband or the wife to be the owner of the sole proprietor business. When only one spouse is the owner, the other spouse can work in the business as an employee. If a married couple who file a joint tax return elect to conduct their business activities as a qualified joint venture, (a trade or business in which the husband and wife materially participate in such venture), the spouses must divide the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture. For more information see Election for Husband and Wife Unicorporated Businesses This is effective for taxable years beginning after December 31, 2006. Also, see Rev. Proc. 2002-69 for Special Rules for Spouses in Community States.
References:
- Publication 334, Tax Guide for Small Business
- Publication 541, Partnerships
- Taxpayer Protection Act of 2007
Partners of a partnership are considered to be self-employed. The partnership must furnish copies of Schedule K-1 to the partners by the partnership information return due date or extended due date. If you are a member of a partnership that carries on a trade or business, your distributive share of the 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:
- Form 1065 Instructions, U.S. Partnership Return of Income
- Publication 334, Tax Guide for Small Business
- Revenue Ruling 69-184
- Publication 541, Partnerships
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 the sole owner of the LLC and the LLC has employees, you will need to get a separate Federal Tax ID number, if you choose to have the LLC report and pay employment taxes with respect to employees of the LLC. If you are not the sole owner of the LLC, you will need a separate Federal Tax ID number for the LLC. See Notice 99-6, 1999-1 CB 321.
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
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 if it were a sole proprietorship (referred to as an entity disregarded as separate from its owner), a partnership, or a corporation. If the LLC has only one owner, (see Publication 555, on community property states), it will automatically be treated as if it were a sole proprietorship (a disregarded entity), unless an election is made for it to be treated as a corporation. If the LLC has two or more owners, it will automatically be treated as a partnership unless an election is made for it to be treated as a corporation. If the LLC does not make a classification election, a default classification of partnership (multi-member LLC) or disregarded entity (single-member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832 (PDF), a default classification will apply.
References:
- Publication 3402 (PDF) Tax Issues For Limited Liability Companies
- Publication 334, Tax Guide for Small Business
- Tax Topic 103, Small Business Tax Education Program
- Publication 542, Corporations
- Publication 541, Partnerships
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:
- Publication 541, Partnerships
- Form 1065 Instructions, U.S. Partnership Return of Income
- Publication 542, Corporations
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.
A personal service corporation is a corporation where the main work of the company is to perform services in the fields of health (including veterinary services), 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:
- Publication 542, Corporations