Choosing a Business Structure

A sole proprietorship is an unincorporated business owned by one person. It is usually the simplest structure to begin, but it does not create a separate liability shield between the owner and the business.

• Federal filing: Income and expenses generally appear on Schedule C with Form 1040, or Schedule F for farming.
• Tax pattern: Profit is taxed to the owner, and net earnings generally are subject to self-employment tax.
• Advantages: Low setup burden, direct reporting and possible access to self-employed retirement, health-insurance and qualified business income benefits when eligible.
• Considerations: Personal assets may be exposed to business debts or claims. A fictitious-name registration, local license or insurance may still be needed.

A general partnership commonly arises when two or more people carry on a business together. A written agreement is important for documenting ownership, contributions, profit sharing, authority, exits and dispute resolution.

• Federal filing: A partnership generally files Form 1065 and issues Schedule K-1 to each partner.
• Tax pattern: Income and loss pass through to the partners, who may owe tax even when cash is not distributed. Self-employment tax may apply to a partner’s share of ordinary business income.
• Advantages: Flexible ownership arrangements and allocations, pass-through treatment and, in some situations, basis from partnership liabilities.
• Considerations: General partners may face personal liability, and poorly documented expectations can lead to costly disputes.
• Limited partnership: Usually has at least one general partner and one or more limited partners. Liability and participation rules differ between them.
• Limited liability partnership: Often used by licensed professionals. Availability, insurance requirements and protection vary by state.

This is a federal tax election rather than a separate state-law entity. It may allow eligible spouses who jointly own and operate an unincorporated business to avoid a partnership return.

• The spouses must file a joint return, both must materially participate and both must elect the treatment.
• Each spouse reports a share of the business on a separate Schedule C or Schedule F and, when required, a separate Schedule SE.
• This can preserve Social Security and Medicare earnings credit for each spouse.
• A business operated through a state-law entity, including an LLC, generally does not qualify. Special rules exist for married-couple entities in community-property states; Florida is not a community-property state.

An LLC is formed under state law and generally offers liability protection with fewer corporate formalities. Its owners are called members. The LLC’s federal tax treatment depends on the number of members and any elections filed.

• One-member LLC: Generally disregarded for federal income tax unless it elects corporate treatment. An individual owner commonly reports activity on Schedule C, E or F.
• Two-or-more-member LLC: Generally taxed as a partnership unless it elects corporate treatment.
• Available elections: An eligible LLC may elect C corporation classification using Form 8832 or S corporation treatment using Form 2553.
• Advantages: Liability protection, ownership flexibility and the ability to select among eligible federal tax classifications.
• Considerations: State fees, annual reports, financing needs and the chosen tax classification can add cost and complexity.

An S corporation is a federal tax status available to qualifying domestic corporations and eligible LLCs. It generally files Form 1120-S and passes income, deductions and credits to shareholders through Schedule K-1.

• Tax pattern: Shareholders generally report their allocated income whether or not cash is distributed.
• Working owners: Shareholder-employees must receive reasonable W-2 compensation before taking non-wage distributions. Qualifying distributions generally are not subject to self-employment tax.
• Advantages: Pass-through treatment, potential payroll-tax planning and possible qualified business income benefits when eligible.
• Considerations: Generally no more than 100 shareholders, one class of stock and only eligible shareholders. Payroll and added compliance are required.
• Basis matters: Loss deductions and tax-free distributions are limited by shareholder basis. Merely guaranteeing a corporate loan generally does not create basis without an actual economic outlay.

A C corporation is a taxpayer separate from its owners. It generally files Form 1120 and pays tax on corporate profit. Dividends are not deductible by the corporation and may be taxed again to shareholders.

• Advantages: Liability protection, unlimited shareholders, multiple classes of stock, a familiar structure for investors and potentially broader employee fringe benefits.
• Considerations: Possible double taxation, more state and corporate formalities, and no pass-through of corporate losses to shareholders.
• Professional corporations: Certain licensed service businesses may organize under special state rules. Federal tax treatment generally follows C corporation rules unless a valid S election is made.
• Advanced planning: Qualified small business stock treatment may be available in limited circumstances, but strict requirements apply.