Self-Employed Individuals

2. Partnership. A “Partnership” is exactly that – a group of like-minded individuals, or in some cases business entities, who band together to form a business entity. Partnerships are popular with professional business associations, such as architectural firms, consultants, CPA practices, law firms and medical practices, and with natural resources and energy businesses such as oil and natural gas exploration and production companies. Partnerships also provide a good mechanism for the senior members to transfer their ownership interest to junior members as they near retirement age.
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   A Partnership is a “pass-through” business entity. Income and expenses, assets, liabilities, and equity are first reported on the partnership’s Federal Form 1065 tax return. Each Form 1065 return includes a Schedule K-1 for each partner that reports the amounts of income and expenses, assets, liabilities, and equity in proportion to each partner’s ownership percentage. These amounts flow through to the partner’s Form 1040 tax return, Schedule E, p.2.
3. S-Corporation (“S-Corp.”). An “S-Corp.” is one type of legal business structure common among small businesses. S-Corp.’s get their name from Subchapter S of the Internal Revenue Code (IRC), under which they’ve elected to be taxed. Requirements of an S-Corp. give a corporation with 100 or fewer shareholders the benefits of incorporation while being taxed as a partnership. One of the most compelling reasons to form an S-Corp. is to avoid the double-taxation levied on C-Corp. income.
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   An S-Corp. is a “pass-through” business entity. Income and expenses, assets, liabilities, and equity are first reported on the S-Corp.’s Federal Form 1120-S tax return. Each Form 1120-S return includes a Schedule K-1 for each shareholder that reports the amounts of income and expenses, assets, liabilities, and equity in proportion to each shareholder’s ownership percentage. These amounts flow through to the shareholder’s Form 1040 tax return, Schedule E, p.2.
4. C-Corporation (“C-Corp.”). The “C-Corp.” is the granddaddy of all business entities in the United States. C-Corp.’s get their name from Subchapter C of the Internal Revenue Code (IRC), under which they’ve elected to be taxed. C-Corp.’s are independent legal entities, owned by their shareholders, that have unlimited growth potential. Most large businesses and public companies are formed as C-Corp.’s because a C-Corp. is a business structure that allows for limitless growth through stock sales (which makes them appealing to investors) and is ideal for large, retail-based businesses.
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   A C-Corp. is not a “pass-through” business entity. The C-Corp. itself is first taxed at the federal corporate tax rate of 21%. Any dividends or profits the company passes on to its shareholders are taxed a second time as personal income.
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   Don’t be blinded like a deer in the headlights over the Tax Cuts and Jobs Act of 2017 (TCJA) provisions that lowered the nominal Federal corporate income tax rate from 35% to 21%. For most small business owners, these provisions are rather meaningless.
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   Because a C-Corp. does not by definition include any “pass-through” mechanism, another drawback to C-Corp.’s is that cash can be distributed out of a C-Corp. only via salary and wages, or via cash dividends, both of which are taxable income at the personal level. This drawback makes a C-Corp. a less desirable choice for the small business owner.
5. Other Business Entities. There are several other, more specialized business entities, such as PLCC’s and PC’s, that one could consider. These entities are established less frequently by small business owners than those described above. For that reason, I have opted not to discuss them here.

You can learn more about business entities here: https://www.irs.gov/pub/irs-pdf/p5868.pdf