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Legal and tax considerations enter into this decision. Only
tax considerations are discussed in this Pub. .
Your form of business determines which income
tax return form you have to file. See Table 2 to
find out which form you have to file.
Sole proprietorships. A sole proprietorship is an unin-
corporated business that is owned by one individual. It is
the simplest form of business organization to start and
maintain. The business has no existence apart from you,
the owner. Its liabilities are your personal liabilities. You
undertake the risks of the business for all assets owned,
whether or not used in the business. You include the in-
come and expenses of the business on your personal tax
return.
More information. For more information on sole pro-
prietorships, see Pub. 334, Tax Guide for Small Business
(For Individuals Who Use Schedule C). If you are a
farmer, see Pub. 225, Farmer's Tax Guide.
Partnerships. A partnership is the relationship existing
between two or more persons who join to carry on a trade
or business. Each person contributes money, property, la-
bor, or skill, and expects to share in the profits and losses
of the business.
A partnership must file an annual information return to
report the income, deductions, gains, losses, etc., from its
operations, but it does not pay income tax. Instead, it
“passes through” any profits or losses to its partners. Each
partner includes his or her share of the partnership's items
on his or her tax return.
More information. For more information on partner-
ships, see Pub. 541, Partnerships.
Business owned and operated by spouses. If you and
your spouse jointly own and operate an unincorporated
business and share in the profits and losses, you are part-
ners in a partnership, whether or not you have a formal
partnership agreement. Do not use Schedule C. Instead,
file Form 1065, U.S. Return of Partnership Income. For
more information, see Pub. 541, Partnerships.
Exception—Community Income. If you and your
spouse wholly own an unincorporated business as com-
munity property under the community property laws of a
state, foreign country, or U.S. possession, you can treat
the business either as a sole proprietorship or a partner-
ship. States with community property laws include Ari-
zona, California, Idaho, Louisiana, Nevada, New Mexico,
Texas, Washington, and Wisconsin. See Pub. 555 for
more information about community property laws.
Exception—Qualified joint venture. If you and your
spouse each materially participate as the only members of
an unincorporated, jointly owned and operated business,
and you file a joint return for the tax year, you can make a
joint election to be treated as a qualified joint venture in-
stead of a partnership for the tax year. Making this elec-
tion will allow you to avoid the complexity of Form 1065
but still give each spouse credit for social security earn-
ings on which retirement benefits are based. For an
explanation of "material participation," see the instructions
for Schedule C, line G.
To make this election, you must divide all items of in-
come, gain, loss, deduction, and credit attributable to the
business between you and your spouse in accordance
with your respective interests in the venture. Each of you
must file a separate Schedule C and a separate Sched-
ule SE. For more information, see Qualified Joint Venture
in the Instructions for Schedule SE.
Corporations. In forming a corporation, prospective
shareholders exchange money, property, or both, for the
corporation's capital stock. A corporation generally takes
the same deductions as a sole proprietorship to figure its
taxable income. A corporation can also take special de-
ductions.
C corporations. The profit of a C corporation is taxed
to the corporation when earned, and then is taxed to the
shareholders when distributed as dividends. However,
shareholders cannot deduct any loss of the corporation.
For more information on corporations, see Pub. 542, Cor-
porations.
S corporations. An eligible domestic corporation (or a
domestic entity eligible to elect to be treated as a corpora-
tion) can avoid double taxation (once to the corporation
and again to the shareholders) as long as it meets certain
tests and elects to be treated as an S corporation. Gener-
ally, an S corporation is exempt from federal income tax
other than tax on certain capital gains and passive in-
come. On their tax returns, the S corporation's sharehold-
ers include their share of the corporation's separately sta-
ted items of income, deduction, loss, and credit, and their
share of nonseparately stated income or loss. For more
information on S corporations and the tests that need to
be met to be eligible to elect to be an S corporation, see
the instructions for Form 2553, Election by a Small Busi-
ness Corporation, and Form 1120-S, U.S. Income Tax Re-
turn for an S Corporation.
Limited liability company. A limited liability company
(LLC) is an entity formed under state law by filing articles
of organization as an LLC. The members of an LLC are
not personally liable for its debts. An LLC may be classi-
fied for federal income tax purposes as either a partner-
ship, a corporation, or an entity disregarded as separate
from its owner by applying the rules in Regulations section
301.7701-3.
More information. For more information on LLCs, see
the Instructions for Form 8832, Entity Classification Elec-
tion.
Getting a Taxpayer
Identification Number
You must have a taxpayer identification number so the
IRS can process your returns. Two of the most common
Publication 583 (January 2021) Page 3