Types of Business Taxes;

 

Choose what type of business entity tax return is best for you:

Corporation

Corporations enjoy most of the rights and responsibilities that an individual possesses, such as the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes. The shareholders elect a board of directors to oversee the organization’s activities. The corporation is liable for the actions and finances of the business, not the shareholders.

There are two major types of corporations: Subchapter C corporations and Subchapter S.

Corporation C

“C” Corporation is a legal entity created by state law that is separate and distinct from its owners (shareholders). It is automatically a Subchapter C corporation unless an election is made to the IRS to become an S Corporation.

  • Corporations can be for-profit, as are most businesses.
  • Corporations can be nonprofit, such as a charitable organization.
  • C Corporations pay tax on all corporate profits.
  • Corporations can make distributions of profits (dividends) to its shareholders.
  • The individual shareholders pay income taxes on the dividends.

 

Corporation S

“S” Corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

  • Form 2553 is submitted to the IRS to elect to be treated as an “S” corporation.
  • Must be a domestic corporation.
  • Have no more than 100 shareholders.
  • May not be partnerships, corporations or non-resident alien shareholders.

 

LLC

An LLC is an entity organized under the laws of a state or foreign country as a limited liability company. For federal tax purposes, an LLC may be treated as a partnership or corporation or be disregarded as an entity separate from its owner. By default, a domestic LLC with only one member is disregarded as an entity separate from its owner and must include all of its income and expenses on the owner’s tax return (for example, Schedule C (Form 1040))

Also by default, a domestic LLC with two or more members is treated as a partnership. A domestic LLC may file Form 8832 to avoid either default classification and elect to be classified as an association taxable as a corporation.

  • An LLC can file Form 1065 if it is considered a partnership.
  • An LLC can file Form 1120 if it is considered a “C” corporation for tax purposes.
  • An LLC can file Form 1120S if it is considered an “S” corporation for tax purposes.

 

Partnership

A Partnership is a legal relationship formed by the agreement between two or more members (partners) to carry on a business as co-owners. The ownership is shared among the partners, which includes all income as well as all debt and liability. It is a “pass-through business”, meaning that the profits and losses of the business pass through to the partners who then include them on their individual tax returns.

  • A Partnership files a Form 1065.
  • Partners can be individuals, corporations, trusts, estates, and other partnerships.
  • Two common forms of partnerships are “general partnerships” and “limited partnerships”.
  • A general partnership is composed of two or more partners who participate in the day-to-day operations of the partnership and have liability as owners for debts and lawsuits.
  • A limited partnership has one general partner who manages the business and one or more limited partners who don’t participate in the operations of the partnership and who don’t have liability.

Nonprofit – 501(c)3

A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes, under the Internal Revenue Code (IRC) 501(c)(3), and other sections. To qualify for nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the nonprofit.

Nonprofit organizations include corporations, trusts, limited liability companies, and unincorporated associations, public charities, private foundations, educational organizations, employee associations, veteran’s organizations, business leagues, credit unions, child care organizations, and teachers’ retirement fund associations, and other organizations recognized by the IRS.

  • Forms 990, 990-EZ or 990-N are used for nonprofit organizations
  • Nonprofit corporations enjoy the same liability protection as regular corporations and limited liability companies.
  • IRS Form 1023 is used to apply for recognition of tax exempt status.
  • Most States also have procedures for applying for tax exempt status.

 

 

PTA

A parent-teacher association (PTA) or parent-teacher-student association (PTSA) is a formal organization composed of parents, teachers and staff that is intended to facilitate parental participation in a school. Much like a PTA, a parent-teacher organization (PTO) is a local, independent parent group. Both are normally federally recognized 501(c)(3) organizations with tax-exempt status.

  • To maintain the tax-exempt status, a Form 990, 990-EZ or 990-N must be filed every year.
  • The series of Form 990 required to be filed depends on the organization’s gross receipts.
  • 990-N, gross receipts less than $50,000.
  • 990-EZ, gross receipts less than $200,000.
  • 990, gross receipts over $200,000.
  • Form 990 is due on the 15th day of the 5th month following the end of the organization’s taxable year.

 

Nonprofit downloadable form

 

Homeowners Association

A Homeowners Association (HOA) is a private membership organization formed by a real estate developer to own and maintain common green areas, streets, and sidewalks and to enforce covenants to preserve the appearance of the development. HOA fees help maintain the quality of life for the community’s residents and protect property values for all owners.

For federal tax purposes, homeowners associations are treated as corporations, unless they have applied to be recognized as a nonprofit by the IRS. Form 1120-H is an income tax form specifically designed for HOAs.

  • A homeowners association may file Form 1120-H if at least 60% of the HOA annual revenue is “exempt-function income.”
  • Exempt-function income includes membership dues, assessments, fees and interest on those fees. Also, 90% of the HOA’s expenditures must be for management, maintenance, acquisition and construction of association property.
  • If the association does not elect to use Form 1120-H, it must file the applicable income tax return, for example, Form 1120.