Pass-through businesses encompass different business structures, each with different advantages and requirements, all of which require action by the owners.Sole proprietorship. A sole proprietorship is the default business structure for a business owner with no partners. Freelancers and independent contractors who perform business activities and haven't filed paperwork with their state to become an LLC or incorporate are sole proprietors by default. Sole proprietors don't have to file separate tax returns for the business. Instead, the owner reporting the business' income and expenses on Schedule C, Profit or Loss From Business, attached to their personal tax return, Form 1040, U.S. Individual Income Tax Return, pays income taxes and self-employment taxes on all business profits.
Partnership. A partnership is the default business structure for businesses with more than one owner. Partnerships file a tax return using Form 1065, U.S. Return of Partnership Income. However, the partnership doesn't pay federal income taxes directly. Instead, each partner receives a Schedule K-1, which they use to report their share of the partnership's taxable income on their personal tax returns.
Limited Liability Company (LLC). LLCs take a little more effort to form than sole proprietorships or partnerships. Typically, members of the LLC need to file articles of organization and an operating agreement with their Secretary of State and pay a filing fee. LLC tax filing depends on whether the LLC has one member or multiple members. The IRS treats single-member LLCs as sole proprietorships for tax purposes, and the member reports business income and expenses on Schedule C, attached to the owner's Form 1040. Multiple-member LLCs file the same form used by partnerships: Form 1065. Each member receives a Schedule K-1, Partner's Share of Income, Deductions, Credits, etc., reporting their share of the LLC's profits and losses.
S corporation. An S corporation, also known as a subchapter S corp., is a special tax status granted by the IRS. It allows organizations to take advantage of many of the same legal protections as a C corporation but be taxed like a pass-through business. S corporations file federal income taxes using Form 1120S, U.S. Income Tax Return for an S Corporation. Each shareholder receives a Schedule K-1, which they use to report profits and losses from the business on their Form 1040.