IRS Publication 583 — Starting a Business and Keeping Records

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 unincorporated 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 income and expenses of the business on your personal tax return.

More information. For more information on sole proprietorships, see Pub. 334. If you are a farmer, see Pub. 225.

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, labor, 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 partnerships, see Pub. 541. 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 partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C (Form 1040). Instead, file Form 1065, U.S. Return of Partnership Income. For more information, see Pub. 541. Exception—Community Income. If you and your spouse wholly own an unincorporated business as community 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 partnership. States with community property laws include Arizona, 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 instead of a partnership for the tax year. Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. For an explanation of TIP "material participation," see the instructions for Schedule C (Form 1040), line G. T o make this election, you must divide all items of income, 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 (Form 1040) and a separate Schedule SE (Form 1040). For more information, see Qualified Joint Venture in the Instructions for Schedule SE (Form 1040).

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 deductions. Ccorporations. The profit of a Ccorporation 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. Scorporations. An eligible domestic corporation (or a domestic entity eligible to elect to be treated as a corporation) 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 Scorporation. Generally, an Scorporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the Scorporation's shareholders include their share of the corporation's separately stated items of income, deduction, loss, and credit, and their share of nonseparately stated income or loss. For more information on Scorporations and the tests that need to be met to be eligible to elect to be an Scorporation, see the instructions for Form 2553, Election by a Small Business Corporation, and Form 1120 -S, U.S. Income Tax Return 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 classified for federal income tax purposes as either a partnership, 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 Election. Publication 583 (12-2024) 3