Sole proprietor, LLC, partnership, S corporation, or C corporation: how each is taxed, when to convert, and the rules that come with each structure, including qualified small business stock.
45 guides, each written by a CPA licensed in the US and Canada.
Partnership breakups trigger mid-year income allocation, hot asset rules under IRC 751, and potential gain recognition on liquidating distributions.
Small Business & BookkeepingTax changes after marriage for business owners: 1. Filing status: MFJ nearly always produces a lower total tax than MFS.
Small Business & BookkeepingThe optimal entity for real estate investment depends on the investment strategy. Entity comparison for real estate investment:.
Small Business & BookkeepingA constructive dividend occurs when a C-Corporation confers an economic benefit on a shareholder without formally declaring a dividend.
Small Business & BookkeepingConverting an LLC to a corporation (or vice versa) is one of the most common entity restructuring transactions for growing businesses. Under Rev. Rul.
Small Business & BookkeepingAn LLC can convert to a corporation through several methods, each with different tax consequences. LLC to corporation conversion methods.
Small Business & BookkeepingWhen a property owner converts a rental property to personal use or converts a personal residence to a rental property, the tax treatment of depreciation.
Small Business & BookkeepingNew LLC owners have no prior-year tax liability, which means the usual 100% safe harbor is $0. First-year estimated tax for new LLCs: 1.
Small Business & BookkeepingCritical tax provisions for LLC operating agreements: 1. Allocation of income and losses (IRC 704(b)). Allocation of income.
Small Business & BookkeepingAn LLC does NOT change your tax rate. A single-member LLC is taxed identically to a sole proprietorship (Schedule C, SE tax on all net profit).
Small Business & BookkeepingAn LLC provides liability protection but does not change the tax treatment by default. A sole proprietor and a single-member LLC file the same Schedule C.
Small Business & BookkeepingMany business owners operate through a single entity when splitting operations across multiple LLCs or corporations would provide better liability.
Small Business & BookkeepingMany small business owners operate through a single entity, but structuring the business across multiple entities (a holding company plus one.
Small Business & BookkeepingMulti-member LLCs default to partnership taxation. Each partner reports their distributive share of income and deductions on their personal return.
Small Business & BookkeepingA multi-member LLC is taxed as a partnership by default (Form 1065). Each member receives a K-1. Multi-member LLC (partnership) tax rules: Filing.
Small Business & BookkeepingWhen a partner exits a partnership, the tax consequences depend on whether payments are for the partner's interest in partnership property (IRC 736(b)).
Small Business & BookkeepingPartnership distributions are generally tax-free to the extent of the partner's outside basis, but the rules governing when a distribution triggers gain.
Small Business & BookkeepingPartnership distributions are generally tax-free to the extent of the partner's basis under IRC 731. Distributions exceeding basis trigger capital gains.
Small Business & BookkeepingGuaranteed payments under IRC 707(c) are payments made by a partnership to a partner for services or the use of capital.
Small Business & BookkeepingA partnership is a pass-through entity that files Form 1065 and issues K-1s to partners. Formation is generally tax-free under IRC 721.
Small Business & BookkeepingPartnerships (including multi-member LLCs taxed as partnerships) are the most flexible but also the most complex business entity for tax purposes.
Small Business & BookkeepingPartnerships (including multi-member LLCs) are pass-through entities that file Form 1065 and issue Schedule K-1 to each partner.
Small Business & BookkeepingOver 30 states now offer a pass-through entity tax election that allows S-Corps and partnerships to pay state income tax at the entity level.
Small Business & BookkeepingHow the PTET works: Without PTET (traditional approach): 1. S-Corp earns $500,000 2. Income passes through to owner on K-1 3.
Small Business & BookkeepingThe pass-through entity tax (PTET) is a state-level election that allows S-Corps and partnerships to pay state income tax at the entity level instead.
Small Business & BookkeepingThe personal holding company (PHC) tax under IRC 541 imposes a 20% penalty tax on undistributed personal holding company income.
Small Business & BookkeepingThe personal holding company (PHC) tax under IRC 541-547 is a 20% penalty tax on undistributed personal holding company income (UPHCI) of certain closely.
Small Business & BookkeepingC-Corporations where 50% or more of stock is owned by 5 or fewer individuals and 60% or more of income is passive face a 20% personal holding company tax.
Small Business & BookkeepingSection 1202 of the Internal Revenue Code allows shareholders who hold qualified small business stock (QSBS) for at least 5 years to exclude up.
Small Business & BookkeepingQualified Small Business Stock under IRC 1202 allows founders to exclude up to $10 million (or 10x basis) in capital gains from federal tax.
Small Business & BookkeepingUnder IRC 1202, founders and investors in qualifying C-Corporations can exclude up to $10 million (or 10x their basis) of capital gains when selling stock.
Small Business & BookkeepingIRC 1202 allows founders and early investors in qualifying C-Corporations to exclude up to $10 million (or 10x their basis.
Small Business & BookkeepingIRC 1202 excludes up to $10 million (or 10x basis) of capital gain on the sale of qualified small business stock held for 5+ years.
Small Business & BookkeepingIRC Section 1202 allows founders to exclude up to $10 million (or 10x basis) in capital gains from the sale of Qualified Small Business Stock held for 5+.
Small Business & BookkeepingIRC 1202 lets founders exclude up to 100% of capital gains on qualifying small business stock held for five years. The exclusion can reach $10M or 10x.
Small Business & BookkeepingSchedule C filers are audited at 3-5x the rate of W-2 employees. Schedule C audit defense documentation system: Income documentation: - Separate business.
Small Business & BookkeepingAn LLC and a sole proprietorship are taxed identically for federal income tax purposes (both report on Schedule C). Compare LLC, S-Corp, and sole.
Small Business & BookkeepingThe pass-through entity tax (PTET) is a state-level election that allows S-Corps, partnerships. The pass-through entity tax is the most widely adopted.
Small Business & BookkeepingWhere a business is incorporated and where it operates can have a dramatic impact on its total state tax burden. State income tax rates (2025, selected.
Small Business & BookkeepingPartnership taxation under Subchapter K of the Internal Revenue Code (IRC 701-777) is the most complex area of business tax law.
Small Business & BookkeepingPartnerships file Form 1065 (informational) and issue K-1s to partners. Partners pay self-employment tax on their distributive share.
Small Business & BookkeepingDissolving a partnership triggers liquidating distributions, basis adjustments, and potential gain recognition.
Small Business & BookkeepingWhen a business partnership dissolves, the tax treatment of liquidating distributions to partners is governed by IRC 731, 732, 736, and 751.
Small Business & BookkeepingWhen two or more partnerships merge, or when one partnership divides into two or more separate entities. Partnership merger mechanics.
Small Business & BookkeepingAdding a partner to a sole proprietorship changes the tax structure from Schedule C to Form 1065 (partnership return). What changes when you add a partner.