If you are choosing which company structure to open, here is a brief overview of the organizational structures and tax treatments. There are two organizational structures: LLC and Corporation. Each has different tax regimes with its own features.
Single-member: This is the tax regime assigned by default if the company has one owner. A separate business return is not filed; the profit report is shown on Schedule C of the owner’s personal tax return. Federal tax, self-employment tax (15.3%), and state tax (if applicable) are paid on all net profit.
Multi-member (Partnership): This is the default for two or more owners. The company files a separate return (Form 1065) but does not pay tax. All profit passes through to the owners’ personal returns, where they pay taxes based on their total income and filing status. Partners in such an LLC can be general or limited, and the taxation depends on this status:
General partner pays Federal tax, self-employment tax (15.3%), and state tax (if applicable).
Limited partner pays Federal tax and state tax (if applicable).
The company files a business return (Form 1120-S) but does not pay taxes. The profit passes through to the owner’s personal return with Form K-1. The company owner is required to be on a W-2 salary from their company. Thus, the total profit from the business activity is transferred to the individual’s tax return in two lines: W-2 (on which all taxes are paid) and K-1 (on which only Federal tax and state tax are paid).
The company files a business return (Form 1120) and pays 21% Federal tax + state tax (rates vary by state). The owner must be on a W-2 salary if they work for the company. Additionally, the owner receives Dividends, which are subject to Federal tax at a rate up to 20%. Therefore, the dividend amount is subject to double taxation: first, the company pays tax on the profit, and then the owner pays tax on the dividends.
A Corporation has two tax regimes: C Corp (default) and S Corp. The rules for taxation are the same as described above for the LLC when an LLC elects to be taxed as an S Corp or a C Corp.
