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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 considered 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 return 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: 12/18/2014

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 (and should file Form 1065 (.pdf), U.S. Return of Partnership Income) unless the spouses qualify and elect to have the business be treated as a qualified joint venture, or they operate their business in one of the nine community property states.
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 Revenue Procedure 2002-69 and the Instructions for Schedule C (.pdf).

Rev. date: 12/18/2014

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

Partners in a partnership (including members of a limited liability company (LLC)) are considered to be self-employed, not employees, when performing services for the partnership.

Rev. date: 12/18/2014

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: 12/18/2014

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:
For federal income tax purposes, an LLC may be classified and taxed as a sole proprietorship (single member), partnership (multi member) or a corporation (single or multi member).
Generally, if a domestic LLC has:
Either one of these entities may elect a classification as a standard corporation. Use Form 8832 (.pdf), Entity Classification Election, to make this election. If a taxpayer does not file Form 8832, the default classification will apply. Different classification rules may apply in certain situations for certain types of businesses, including: banks, insurance companies and nonprofit organizations that are also organized as an LLC.
Note: If an LLC that is otherwise disregarded has employees, the law treats it as an entity separate from its owner for reporting and payment of employment taxes.

Rev. date: 12/18/2014

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

Partnerships and corporations have different standards for filing an income tax return.
Refer to the Instructions for Form 1065 (.pdf), U.S. Return of Partnership Income, for exceptions to filing requirements.
Refer to the Instructions for Form 1120-F (.pdf), U.S. Income Tax Return of a Foreign Corporation, for other reasons a foreign corporation may file a return and exceptions to filing requirements.

Rev. date: 12/18/2014

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 closely held corporation is subject to additional limitations in the tax treatment of items such as passive activity losses, at-risk rules and compensation paid to corporate officers.
A personal holding company:
A corporation will be considered a personal holding company if it meets both the Income Test and the Stock Ownership Test.
Refer to the Instructions for Schedule PH (Form 1120) (.pdf), U.S. Personal Holding Company (PHC) Tax, for more information and a list of exceptions.
A personal service corporation:
Generally, the testing period for any tax year is the prior tax year. If the corporation has just been formed, the testing period begins on the first day of its tax year and ends on the earlier of:
A. The last day of its tax year, or
B. The last day of the calendar year in which its tax year begins.