Sole Proprietor, Partnership, Limited Liability
Company/Partnership (LLC/LLP),
Corporation, Subchapter S Corporation
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
Can a husband and wife run a business as a sole proprietor or do they need to be a partnership?
It is possible for either the husband or the wife to be the owner of the sole proprietor business. The other person could work in the business as an employee. If the spouses intend to carry on the business together and share in the profits and losses, then they have formed a partnership. See Rev. Proc. 2002-69 for Special Rules for Spouses in Community States.
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I recently formed a limited liability company (LLC). The LLC has no employees. Do I need a separate Federal Tax ID number for the LLC?
No, you will not need a separate Federal Tax ID number for the LLC if you are the sole owner of the LLC and the LLC has no, employees. If you are not the sole owner of the LLC or if the LLC has employees, you will need a separate Federal Tax ID number for the LLC.
References:
- Publication 1635 (PDF), Understanding your EIN - Employer identification Number - IRS
- Form SS4 (PDF), Application for Employer Identification Number
- Form 8832 (PDF), Entity Classification Election
How is the IRS notified of the entity classification under the tax regulations?
Under regulations, many business entities can elect the tax entity (partnership, corporation, or disregarded entity) that best suits their needs. This approach is popularly called "check the box." Taxpayers should notify the IRS of any check-the-box election by filing Form 8832 (PDF), Entity Classification Election. If a taxpayer does not file Form 8832, a default classification will apply.
Read Reg. 301.7701-3 and Form 8832 for more information.
References:
- Form 8832 (PDF), Entity Classification Election
- Reg. 301.7701-3
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your state's requirements, you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status. Instructions for Form 2553, Election by a Small Business Corporation, provides the information on these requirements.
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12.3 Small Business/Self-Employed/Other Business: Form W-2, FICA, Medicare, Tips, Employee Benefits
I started a new business. I need information on how to file Forms W-2?
First of all, Form W-2 (PDF) should be furnished to your employees by January 31. It is also your responsibility as an employer to file Forms W-2 with the Social Security Administration (SSA) for your employees, showing wages paid and taxes withheld for the year. You must send Copy A to the SSA with Form W-3 (PDF) by February 28. If you file electronically (not by magnetic media) the due date is March 31. Form W-3 shows the total of all W-2s being sent. The address is listed in the Instructions for Form W-2 and W-3. Refer to Tax Topic 752, Form W-2 - Where, When and How to File, or Publication 15 (PDF), Circular E, Employer's Tax Guide.
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12.5 Small Business/Self-Employed/Other Business: Form SS-4 & Employer Identification Number (EIN)
Is an employer ID number the same as a tax ID number?
Yes, an employer identification number, or EIN, is also known as a taxpayer identification number, or TIN. A sole proprietorship that has no employees and files no excise or pension tax returns is the only business that does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.
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As a sole proprietor, do I need an employer identification number (EIN)?
As a sole proprietor, you would need to obtain an identification number if either of the following apply: - you pay wages to one or more employees, or
- you file pension or excise tax returns.
If these conditions do not apply, your social security number is your taxpayer identification number.
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Is an employer identification number (EIN) required if the husband and wife are the only persons working in the business?
If both of you carry on a business together and share in the profits and losses, you are a partnership and each would receive a Form 1065, Schedule K-1 (PDF) that is important for determining your self-employment income. If you work for your spouse, you should receive a Form W-2, showing taxes withheld and the owner spouse would claim the wages paid to you as a deduction. Both a partnership and a sole proprietor with an employee must have an EIN.
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Does a small company need a tax ID number?
A sole proprietor who does not have any employees and who does not file any excise or pension plan tax returns is the only business person who does not need an employer identification number. In this instance, the sole proprietor uses his or her social security number as the taxpayer identification number.
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How do I apply for an employer identification number (EIN)?
To obtain an EIN, you must complete Form SS-4 (PDF), Application for Employer Identification Number. After you have completed the Form SS-4, you can get the EIN by mail, FAX, or by phone. The instructions for Form SS-4 provide both an IRS service center address and a phone number to apply under the Tele-TIN program. For more information, refer to Tax Topic 755, Employer Identification Number (EIN) - How to Apply, or Publication 1635 (PDF), Understanding Your EIN.
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I would like to submit Form SS-4, Application for Employer Identification Number, by fax. What is the fax number?
You can find the fax telephone numbers by calling the IRS at 1-800-829-0922 or refer to Tax Information for Business. This can be found on the IRS website www.irs.gov under Businesses.
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Under what circumstances am I required to change my employer identification number (EIN)?
If you already have an EIN, and the organization or ownership of your business changes, you may need to apply for a new number. Some of the circumstances under which a new number is required are as follows:
- An existing business is purchased or inherited by an individual who will operate it as a sole proprietorship
- A sole proprietorship changes to a corporation or a partnership,
- A partnership changes to a corporation or a sole proprietorship,
- A corporation changes to a partnership or a sole proprietorship, or
- An individual owner dies, and the estate takes over the business.
This list is not all inclusive. Please refer to the website www.irs.gov under Business, then Employer ID Numbers.
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If I have an employer identification number (EIN) and do not need it, how can I revoke the EIN?
If you do not need to retain your EIN and wish the EIN to be revoked, you can write to the Entity Control Unit at the IRS Service Center where you would normally file your returns and make that request. Make sure that either the President or other Principal Officer signs the statement, if it is a corporation, or a managing member, if it is a limited liability company, or a general partner, if it is a partnership.
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Do businesses have to obtain the taxpayer identification number (TIN) from vendors and keep it somewhere on file?
In general, businesses are required to obtain the TIN from vendors if they are required to file any return, document or other statement that calls for the taxpayer identification numbers (TINs) of other taxpayers. Form W-9 (PDF), Request for Taxpayer Identification Number and Certification, can be used to make the request. The business should also maintain the verification of these numbers in their records.
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12.7 Small Business/Self-Employed/Other Business: Income & Expenses
I gave my friend a loan to do business, but the business went bankrupt and she did not pay me back. Can I deduct this bad loan?
If someone owes you money that you cannot collect, you have a bad debt. Bad debts are deductible only if the amount owed has been previously included in your income. For a discussion of what constitutes an valid debt, see Publication 535 (PDF), Business Expenses and Publication 550 (PDF), Investment Income and Expenses. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for expected income you have not received, since it was never included in your income.There are two kinds of bad debts - business and nonbusiness.
A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when the surrounding facts and circumstances indicate there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due.
A nonbusiness bad debt is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as a short-term capital loss. It is subject to the capital loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate return. A nonbusiness bad debt requires a separate detailed statement attached to the schedule D. For more information on nonbusiness bad debts, refer to Publication 550 (PDF), Investment Income and Expenses. For more information on business bad debts, refer to Publication 535 (PDF), Business Expenses.
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How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important to distinquish hobby expenses from expenses incurred in an activity engaged in for profit. In making this distinction, all facts and circumstances with respect to the activity are taken into account and no one factor is determinative. Among the factors which should normally be taken into account are the following:
- Whether you carry on the activity in a businesslike manner
- Whether the time and effort you put into the activity indicate you intend to make it profitable
- Whether you depend on income from the activity for your livelihood
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
- Whether you change your methods of operation in an attempt to improve profitability
- Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business
- Whether you were successful in making a profit in similar activities in the past
- Whether the activity makes a profit in some years, and how much profit it makes
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity
Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.
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12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business
I invested personal funds to start a new corporation last year. How can I get credit for this on my personal income tax return?
If you invest your personal funds to start a corporation, this is your basis in the stock of the corporation. Your stock basis will show on the balance sheet of the corporation's Form 1120 (PDF), U.S. Corporation Income Tax Return. Your investment will not show up on your personal income tax return until you sell the stock or until the corporation goes out of business.
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I am starting a small business. What assistance can IRS give me?
If you are starting or already have a small business and need information on taxes, recordkeeping, accounting practices, completing Federal business and employment tax returns, and meeting other Federal tax obligations, there is help available. Much of the assistance is free. The service is called Small Business Tax Education Program, or STEP. Go to Around the Nation for seminars in your area or check out Tax Info For Business on the IRS web site. You can find out more about this program for small business by referring to Publication 1066 (PDF), Small Business Tax Workshop, or Tax Topic 103 , Small Business Tax Education Program (STEP).
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I want to start my own business. Do I need a business license?
The IRS does not require or issue business licenses. Whether or not the particular type of business or service you provide is regulated by licensing requirements is a question for your state, city, or local government agencies. To access the state you need to direct your question to, please go to our Alphabetical State Index.
How do I find out about whether or not my business needs to collect sales tax?
Your question is a state tax question. Your state revenue department should provide information regarding sales tax to you. To access the state you need to direct your question to, please go to our Alphabetical State Index.
What forms do you use when you have a small business?
The annual income tax forms that you would use to report you business activity to the IRS would depend on the type of entity you operate your business under.
- Sole Proprietorships use Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ (PDF), Net Profit from Business and Form 1040, Schedule SE (PDF), Self-employment Tax.
- Partnerships use Form 1065 (PDF), U.S. Partnership Return of Income and Schedule K-1.
- Corporations use Form 1120 (PDF), U.S. Corporation Income Tax Return.
- S Corporations use Form 1120S (PDF), U.S. Income Tax Return for an S Corporation.
- Limited Liability Companies use one of the choices above according to their structure. If you hired employees to work in your business, if you are liable for excise tax, or heavy highway vehicle use tax, other forms and publications would come into play.
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If you start your own business and send in your quarterly estimated income taxes, must you also file a personal income tax return at the end of the year?
If you have $400 or more of net profit from your business, you will have to file a Form 1040 with a Form 1040, Schedule C (PDF), Profit and Loss from Business (Sole Proprietorship) and a Form 1040, Schedule SE (PDF), Self-employment Tax.
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I just started a small business and want to know if I have to file my income taxes quarterly or at the end of the year?
For income taxes you will likely file annually, but you may have to pay quarterly. As a self-employed individual, you must determine if you are liable for making estimated taxes which are paid on a quarterly basis. The estimated tax worksheet is Form 1040ES (PDF), Estimated Tax for Individuals. When you file your income tax return, you include the income from the business on that return. The forms to be filed are the Form 1040 (PDF), U.S. Individual Income Tax Return, Form 1040, Schedule C (PDF), Profit or Loss from Business, and Form 1040, Schedule SE (PDF), Self-employment Tax. You may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business.
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