We're taking a look of the complicated nuances of business tax and breaking it down piece by piece for our readers.
A key consideration in choosing the right business type (sole proprietorship, LLC, partnership) is picking which IRS category helps you save money in the long run. Of course you must meet certain technical requirements to be a certain type of business. For example, a partnership can't have just one partner. However, another deciding factor in business selection should be tax treatment. In other words, how much or how little will the IRS tax your business.
In the search for favorable tax treatment, businesses usually want to minimize federal income and employment taxes.
However, not every business type fits with every tax category. So the search is really kind of circular. A business wants to choose its business type by choosing its desired tax category but each tax category excludes certain businesses. So what then must the sane individual do in order to pick favorable taxation while keeping all of their hair? Don't worry. We will unpack this all in the upcoming articles about taxes (which are sure to cure your insomnia). For now, consider the table below to help you familiarize yourself with the tax categories available to each business.
Available Tax Categories Based on Type of Company
Here's some lingo to keep you looking cool. Under IRS standards, a business can generally be taxed under sub-section C, K or S of the tax code (hence the "Sub- . . ." colloquialism) or instead listed as a disregarded entity. Disregarded entities are simply taxed along with a business owner's personal taxes.
Each form of ownership has a default tax category (denoted with an asterisk). A business owner may opt in to another category by filing a form to that effect with the IRS.
LLC- Single Member Only
Disregarded*
Sub-C
Sub-S
LLC- Multi Member
Sub-K*
Sub-C
Sub-S
Partnerships (but not Limited Partnerships)
Sub-K*
Sub-S
Corporations
Sub-C*
Sub-S (but only when eligible)
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