Limited Liability Companies: A LLC can be handled as a disregarded entity, a corporation, or partnership. Members of an LLC are mostly treated separate from the owner. They will follow sole proprietorships rules if member is an individual and activity is trade or business, not rental. LLC members may be subject to “S” corporation tax if they meet the requirements. If it does not make the requirements for the above, then multi-member LLC will follow partnership rules for tax purposes.
Sole Proprietorship: The formation of a sole proprietorship is easy and non-taxable. As owner of a sole proprietorship, it is appropriate to report all business income or losses on the personal income tax return; the business alone is not taxed separately. If the owner employs a child under 18 or a spouse, they may deduct the wages paid. The owner is held responsible for any obligations coming from the company with no liability protection. If the owner contributes to the retirement plan, it is not a business deduction and likewise, will be include in self-employment tax. The owner can’t deduct their own fringe benefits as a business expense, only their employee’s. If the owner’s business was not willed to another, the business will no longer exist upon death. Partnerships: Partnerships, unlike sole proprietorships, are entities separate from their owners but there is still one level of tax imposed. If property is contributed or distributed, there is usually no gain recognized and it is usually tax-free. There is flexibility with partners added but because of this, the IRC rules for partnerships are very complex. A partner may be subject to self-employment taxes prior to putting money aside for a retirement plan. A business may find partnership entities useful if they plan to add partners in the future.
Corporations are created under state law. A corporation may either be a “C” corporation or an “S” corporation.