Entity

• Partnership
• Form 1065, U.S. Return of Partnership Income
• IRS Pub. 541, Partnerships
• IRS Pub. 3402, Taxation of Limited Liability Companies
• IRC Subchapter K, §701 through §761

Accounting & Recordkeeping

• Small partnerships are not required to provide a balance sheet and can use the same bookkeeping system as a sole proprietor.
• Larger partnerships must provide a balance sheet with the return, which generally requires double-entry bookkeeping.
• A partnership generally must use the same tax year as its partners, but can use a fiscal year if there is a business purpose or an IRC §444 election was made.
• Complex books and records are needed when a partner exchanges property (other than cash) for a partnership interest or for special allocations and basis elections.

Fringe Benefits

• Partners may be eligible for some excludable fringe benefits.
• Taxable benefits are reported as guaranteed payments or as an adjustment to a partner’s distributable share of profits (depending on the benefit and facts).

Liability

• A general partner is personally liable for all debts and lawsuits brought against the partnership.
• Exception: If the partner is a limited partner, or the business is organized as an LLC, liability is generally limited to the partner’s investment (still subject to malpractice liability or personal debt guarantees).

Entity

• S corporation
• Form 1120-S, U.S. Income Tax Return for an S Corporation
• IRC Subchapter S, §1361 through §1379

Accounting & Recordkeeping

• Double-entry bookkeeping may be required depending on income and other factors affecting the need for a balance sheet on the return.
• Must use a calendar year unless it establishes a business purpose for using a fiscal year, or it makes an IRC §444 election.

Fringe Benefits

• Shareholder/employees may be eligible for some excludable fringe benefits.
• Benefits added to taxable wages on Form W-2 of more than 2% shareholders include:
  • Accident and health plans
  • Up to $50,000 of group-term life insurance
  • Meals and lodging furnished for the employer’s convenience (subject to rules)

Liability

• A shareholder’s liability is limited to the amount invested (still subject to malpractice liability or personal debt guarantees).

Entity

• C corporation
• Form 1120, U.S. Corporation Income Tax Return
• IRS Pub. 542, Corporations
• IRC Subchapter C, §301 through §385

Accounting & Recordkeeping

• Double-entry bookkeeping may be required if the tax return requires a balance sheet.
• No restriction on use of a fiscal year.
• Exception: A personal service corporation (PSC) must use a calendar year unless it establishes a business purpose for using a fiscal year or makes an IRC §444 election.
• Required to use the accrual method of accounting if average annual gross receipts exceed $31 million (subject to applicable-year rules and exceptions).

Fringe Benefits

• Shareholder/employees may be eligible for excludable fringe benefits, generally to the same extent as any other employee (subject to nondiscrimination rules).
• Benefits can include health insurance and reimbursement, education, life insurance, etc. (subject to the plan and rules).

Liability

• A shareholder’s liability is limited to the amount invested (still subject to malpractice liability or personal debt guarantees).

Sole Proprietorship

• No formal creation process
• Easy to operate and dissolve
• No separate tax return
• Easy to integrate business use of home deductions
• No double taxation of profits

• No liability protection (except through insurance)
• Self-employment tax assessed on entire net profit
• Transfer of ownership can be complex
• Limited access to fringe benefits for owners

• Seasonal or part-time businesses
• Businesses with little liability
• Home-based businesses
• Businesses intended to operate for the owner’s life only

Single-Member LLC

• Simple creation process
• Easy to operate and dissolve
• No separate tax return
• Easy to integrate business use of home deductions
• Liability protection for member (except malpractice)
• No double taxation of profits

• Self-employment tax assessed on entire net profit
• Transfer of ownership can be complex
• Limited access to fringe benefits for owners
• LLC laws vary widely among states
• Failure to follow statutory requirements can result in loss of LLC status

• Businesses with potential liability in operations
• Businesses intended to operate for the owner’s life only

Multi-Member LLC

• Limited liability for all members (except malpractice or debt guarantees)
• Unlimited number of members
• Separate entity from members for operational flexibility
• Ownership via membership interests, easier transfer than sole ownership
• No double taxation of profits

• Requires a separate tax return
• LLC laws vary widely among states
• Failure to follow statutory requirements can result in loss of LLC status

• Businesses requiring equity capital
• Businesses with potential liability in operations
• Businesses intended to exist beyond the lives of the members
• Businesses expecting ownership changes over time

General Partnership

• No limit on partner number or type
• Can consolidate multiple business lines or investments
• Flexible allocation of profit, loss, and distributions
• Favorable tax treatment upon liquidation
• No double taxation of profits

• Requires a separate tax return
• Unlimited liability for all partners
• Difficult to dissolve or change ownership without planning
• Requires tracking of partner basis (inside and outside)
• Partners’ share of income subject to self-employment tax

• Two established businesses wishing to work as one
• Partners seeking to consolidate multiple entities into one

Single

• You can file as Single if any of the following were true on December 31:
• You were never married
• You were legally separated under a final decree of divorce or separate maintenance
• Your spouse died before January 1 of the tax year and you did not remarry

Married Filing Jointly (MFJ)

• You were married at the end of the year (even if living apart)
• Your spouse died during the year and you did not remarry
• You were married in a common-law marriage recognized by the state
• Both spouses report all income and deductions on one return

Married Filing Separately (MFS)

• Standard deduction is limited
• Many credits and deductions are reduced or disallowed
• Capital loss deduction limited to $1,500

• Child Tax Credit limited or unavailable
• Earned Income Credit not allowed
• Education credits generally disallowed
• Retirement contribution deductions limited

Head of Household (HOH)

• Available to unmarried taxpayers (or married but considered unmarried)
• You must pay more than half the cost of keeping up a home
• You must have a qualifying child or qualifying relative

• Son, daughter, stepchild, foster child, or descendant
• Brother, sister, half-brother, half-sister, or their descendants
• Parent, grandparent, or other qualifying ancestor

Qualifying Surviving Spouse (QSS)

• Available for the first two years after your spouse’s death
• You did not remarry during the applicable year
• You have a child or stepchild you can claim as a dependent
• You paid more than half the cost of maintaining the home

Married but Considered Unmarried (HOH Rule)

• You lived apart from your spouse for the last 6 months of the year
• You did not file a joint return
• You paid more than half the cost of keeping up the home
• Your home was the main home of your child for more than half the year