Understand the choices
A sole proprietorship generally reports business activity on its owner’s return. Partnerships generally pass results through to partners. A C corporation generally pays its own income tax, while an eligible S corporation generally passes income and losses through to shareholders.
Understand what an LLC means
An LLC is created under state law. Its federal tax treatment depends on ownership and elections; forming an LLC does not automatically create S corporation tax treatment. Obtain legal advice on liability and operating agreements.
Compare the complete cost
Ask for a comparison using expected profit, owner involvement, payroll, state taxes, and annual filing costs. An election that saves one type of tax may add other expenses and obligations. Revisit the decision when ownership or earnings change.
A practical example
Two owners starting a company should agree on contributions, decision-making, and how someone can exit before choosing a tax election. The lowest projected tax bill is only one part of that decision.
What to gather
- Owner names, roles, and ownership percentages
- Profit forecast and expected owner payments
- Existing legal agreements and tax elections
- State formation and annual filing costs
Official references
General educational information, not individualized tax, legal, or investment advice. Federal rules are summarized; state rules and your circumstances may differ. Check the rules for your tax year before acting.