Small Business/Self-Employed/Other Business > Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

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Frequently Asked Tax Questions

Small Business/Self-Employed/Other Business - Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

Rev. date: 1/2009

Can a husband and wife run a business as a sole proprietor or do they need to be a partnership?

Form 1040 (Schedule SE)
Husband-Wife Business
New trade or business
Partnership
Profit or Loss from Business (Sole Proprietorship)
Publication 541
Self-Employment

For a business to be classified as a sole proprietorship:

Either the husband or the wife would be the ownerof the business.
Either of the spouses can work in the business as an employee.

If a married couple who file a joint tax return elects to conduct their business activities as a qualified joint venture:

The husband and wife must materially participate in the trade or business.
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.

Rev. date: 1/2009

I recently formed a limited liability company (LLC). The LLC has no employees. Do I need a separate Federal Tax ID number for the LLC?

Application for Employer Identification Number
Federal Employer Identification Number
Identification Number
Individual taxpayer identification number
Limited Liability Company
New trade or business
P3402

If you are the sole owner of the LLC and the LLC has no employees, you will not need a separate Federal Tax ID number.

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.

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.

Rev. date: 1/2009

For IRS purposes, how do I classify a limited liability company? Is it a sole proprietorship, partnership or a corporation?

Limited Liability Company
P3402
Partnership
Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent
Self-Employment

A limited liability company (LLC) is an entity:

Formed under state law by filing articles of organization as an LLC.
Where none of the members of an LLC are personally liable for its debts.
Must 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.
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 disregarded entity (single-member LLC) or partnership (multi-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.

Rev. date: 1/2009

Are partners considered employees of a partnership or are they self-employed?

Compensation, Wage, Salary
Employment Tax
Partnership
Publication 541
Self-Employment
U.S. Return of Partnership Income

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.

Rev. date: 1/2009

Must a partnership or corporation file a tax form even though it had no income for the year?

Corporation
Partnership
U.S. Corporation Income Tax Return
U.S. Return of Partnership Income

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.

Rev. date: 1/2009

Can you give me plain English definitions for the following: (1) a closely held corporation, (2) a personal holding corporation, and (3) a personal service corporation?

Corporation
Personal Service Corporation (PSC)
Section 280H Limitations for a Personal Service Corporation (PSC)

Generally, a closely held corporation is a corporation that:

Has more than 50% of the value of its outstanding stock owned (directly or indirectly) by 5 or fewer individuals in the last half of the tax year.
Are subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules, and compensation paid to corporate officers.

The definitions for the terms "directly or indirectly" and "individual" are in Publication 542, Corporations.

A personal holding company is:

Defined in Internal Revenue Code section 542.
A personal holding company if both the Income Test and the Stock Ownership Test are met.

The Income Test states that at least 60% of the corporation's adjusted ordinary gross income for the tax year is from dividends, interest, rent, and royalties.
The Stock Ownership Test states that 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.

Refer to the Form 1120, Schedule PH Instructions for more information and a list of exceptions.

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.
Substantially all of the stock is owned by employees, retired employees, or their estates.
Examples may be law firms and medical clinics.


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