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Frequently Asked Tax Questions

Small Business, Self-Employed, Other Business - Entities

  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: 08/04/2012

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 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 for Schedule C

Rev. date: 08/04/2012

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


Rev. date: 08/04/2012

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?


Rev. date: 08/04/2012

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: 08/04/2012

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


Rev. date: 08/04/2012

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 Instructions for Schedule PH (Form 1120) for more information and a list of exceptions.
A personal service corporation is a corporation where:
Additional Information
Publication 542, Corporations