Choose a structure with the tax consequences in plain view.
Sole proprietorship, LLC, partnership, S corporation, or C corporation: each is taxed differently, and the right answer depends on your profit, your owners, and your plans. FMT Advisors lays out what each choice means before you commit.
How each structure is taxed
The legal form of a business and its tax treatment are related but not the same thing. This is how the common structures are taxed at the federal level.
| Structure | How income is taxed | Filed on |
|---|---|---|
| Sole proprietorship or single-member LLC | Business income and expenses flow to the owner's personal return. Net profit is subject to self-employment tax. | Schedule C, Form 1040 |
| Partnership or multi-member LLC | The entity files an information return. Income passes through to partners on Schedule K-1 and is taxed on their personal returns. | Form 1065 |
| S corporation | Income passes through to shareholders on Schedule K-1. Owner-employees are paid reasonable compensation through payroll before taking distributions. | Form 1120-S |
| C corporation | The corporation pays tax on its own income. Dividends paid to shareholders are taxed again on their personal returns. | Form 1120 |
An LLC is a legal form, not a tax classification. By default a single-member LLC is taxed as a sole proprietorship and a multi-member LLC as a partnership, but an LLC can elect to be taxed as an S corporation or a C corporation. The legal wrapper and the tax treatment are separate decisions.
Questions we work through with you
- Is an S corporation election worthwhile at your level of profit, once payroll costs and added compliance are counted?
- What is reasonable compensation for an owner who works in the business, and how should it be documented?
- How should multiple owners share income, losses, and responsibilities, and what does that mean for each owner's return?
- What changes when you hire employees, operate in a second state, or add a new line of business?
- Which retirement plan options fit the structure, and what would they require in contributions for employees?
Deadlines that matter
Entity decisions have calendars. An S corporation election is made on Form 2553 and is generally due within two months and fifteen days of the start of the tax year in which it is to take effect. Late-election relief is sometimes available, but it is far better to decide on time. New entities also have registration and payroll setup requirements that begin well before the first return is due.
Forming an entity, drafting an operating agreement, and evaluating liability protection are legal matters. FMT Advisors focuses on the tax consequences of the structure and works alongside your attorney where legal questions arise.
Start with a conversation.
Tell us about your situation, your business, or the notice on your desk. We will follow up to schedule a consultation.