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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

  1. Can a husband and wife operate a business as a sole proprietorship or do they need to be a partnership?
  2. Are partners considered employees of a partnership or are they self-employed?
  3. I recently formed a limited liability company (LLC). The LLC has no employees, is not subject to relevant excise taxes, and has not elected to be taxed as a corporation. Do I need a separate Federal Tax ID number for the LLC?
  4. For IRS purposes, how do I classify a domestic limited liability company? Is it a sole proprietorship, partnership or a corporation?
  5. Must a partnership or corporation file a tax form even though it had no income for the year?
  6. 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?

Rev. date: 3/15/2011

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

Unless a business meets the requirements listed below to be a qualified joint venture, a sole proprietorship must be solely owned by one spouse, and the other spouse can work in the business as an employee. A business jointly owned and operated by a husband and wife is a partnership unless the spouses elect to be treated as a Qualified Joint Venture or, in a community property state, Rev. Proc. 2002-69 applies.

A married couple who jointly own and operate a trade or business may choose for each spouse to be treated as a sole proprietor by electing to file as a “qualified joint venture.” Requirements for a qualified joint venture:

• The only members in the joint venture are a husband and wife who file a joint tax return,
• The trade or business is owned and operated by the spouses as co-owners (and not in the name of a state law entity such as an LLC or LLP),
• The husband and wife must each materially participate in the trade or business, and
• Both spouses must elect qualified joint venture status on Form 1040 by dividing the items of income, gain, loss, deduction, credit and expenses in accordance with their respective interests in such venture and each spouse filing with the Form 1040 a separate Schedule C, C-EZ, or For Form 4835 accordingly, and, if required, a separate Schedule SE to pay self-employment tax.

The qualified joint venture rules are effective for taxable years beginning after December 31, 2006.  For more information see Election for Husband and Wife Unincorporated Businesses.

Husband and wife businesses in community property states may sometimes qualify to be treated similarly to a sole proprietorship.  For Special Rules for Spouses in Community States see Rev. Proc. 2002-69 and the instructions to Schedule C. 

Rev. date: 1/1/2011

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

 
   
• Partners or members 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 general partner of a partnership that carries on a trade or business, your distributive share of the income or loss from that trade or business plus any trade or business items that are separately stated is net earnings from self-employment.
• If you are a limited partner of a partnership that carries on a trade or business, guaranteed payments you receive for services you rendered to or on behalf of the partnership are net earnings from self-employment. 
 

Rev. date: 1/1/2011

I recently formed a limited liability company (LLC). The LLC has no employees, is not subject to relevant excise taxes, and has not elected to be taxed as a corporation. Do I 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, you will not need a separate Federal Tax ID number.
If you are not the sole owner of the LLC, you will need a separate Federal Tax ID number for the LLC.

Rev. date: 1/1/2011

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

A domestic limited liability company (LLC) is an entity:
Generally, if a domestic LLC has:
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. Different classification rules may apply in special situations, including banks, insurance companies, and nonprofit organizations that are LLCs.

Rev. date: 1/1/2011

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

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: 1/1/2011

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?

Generally, a closely held corporation is a corporation that:
The definitions for the terms "directly or indirectly" and "individual" are in Publication 542, Corporations.
A personal holding company is:
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:
Additional Information
Publication 542 Corporations