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.
References: For IRS purposes, how do I classify a limited liability company? Is it a partnership or a corporation?
A limited liability company (LLC) is an entity formed under state law by filing articles of organization as an LLC. Unlike a partnership, none of the members of an LLC are personally liable for its debts. An LLC may be classified for Federal income tax purposes as a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), partnership or a corporation. If the LLC has only one owner, it will automatically be considered to be a sole proprietorship (referred to as an entity to be disregarded as separate from its owner), unless an election is made to be treated as a corporation. If the LLC has two or more owners, it will automatically be considered to be a partnership unless an election is made to be treated as a corporation. If the LLC does not elect its classification, a default classification of partnership (multi-member LLC) or sole proprietorship (single member LLC) will apply. The election referred to is made using the Form 8832 (PDF), Entity Classification Election.
References: For federal tax purpose, is a limited liability company (LLC) with a single member (owner) treated as a partnership, corporation, or sole proprietorship?
An LLC having a single owner will be treated as a sole proprietorship unless an election is made to be treated as a corporation. The election is made using Form 8832 (PDF), Entity Classification Election.
References: - 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
12.2 Small Business/Self-Employed/Other Business: Form 1099-MISC & Independent Contractors I work as an independent contractor, but I do not own a business and do not perform services in the name of a business. Can I file my tax return without filing Schedule C or Schedule SE?
The income you earn as an independent contractor generally will be considered income from self-employment and you will need to file Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship), or you may qualify to use Form 1040, Schedule C-EZ (PDF), Net Profit from Business. You will also need to use Form 1040, Schedule SE (PDF), Self-Employment Tax, if you had net earnings from self-employment of $400 or more. Since there is no withholding on your self-employment income, you may need to make quarterly estimated tax payments. This is done using a Form 1040ES (PDF), Estimated Tax for Individuals.
References: - Form 1040, Schedule C (PDF), Profit or Loss from Business (Sole Proprietorship)
- Form 1040, Schedule C-EZ (PDF), Net Profit from Business
- Instructions for Form 1040, Schedule C
- Form 1040, Schedule SE (PDF), Self-Employment Tax
- Tax Information for Business
- Form 1040ES (PDF), Estimated Tax for Individuals
- Publication 1779 (PDF), Employee Independent Contract Brochure
- Publication 533 (PDF), Self Employment Tax
- Publication 505 (PDF), Tax Withholding and Estimated Tax
- Publication 334 (PDF), Tax Guide for Small Business
12.5 Small Business/Self-Employed/Other Business: Form SS-4 & Employer Identification Number (EIN) 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.
References: 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.
References: 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.
References: 12.8 Small Business/Self-Employed/Other Business: Schedule C & Schedule SE I am a sole proprietor. Can I use Schedule C-EZ instead of Schedule C?
You can use Form 1040, Schedule C-EZ (PDF) to determine your net profit if you have only one sole proprietorship and you meet all of the following requirements: your business expenses were not more than $2,500, and you did not have a net loss from your business, you use the cash method of accounting, and you did not have an inventory during the year. There are other requirements. Refer to page 1 of Schedule C-EZ to see if you qualify. Additional information is also available in Tax Topic 408, Sole Proprietorship.
References: 12.9 Small Business/Self-Employed/Other Business: Starting or Ending a Business How do I report the closing of a sole proprietorship business?
When a sole proprietor ends a business, the last Form 1040, Schedule C (PDF), Profit or Loss from Business, filed for that business does not require notation as a final return because the business is not a separate entity from the sole proprietor. You simply quit filing a Schedule C with your income tax return.
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