In the United States, how a business is taxed at the federal level is partly dependent on how it is organized. The income of subchapter C corporations, also known as "regular" corporations, is taxed once at the corporate level according to the corporate tax system, and then a second time at the individual-shareholder level according to the individual tax rates when corporate dividend payments are made or capital gains are recognized. This leads to the so-called "double taxation" of corporate income (profits). Businesses that choose any other form of organization are, in general, taxed only at the individual level. That is, the income of certain business types passes through to their owners where it is taxed at individual income tax rates. Examples of these alternative "pass-through" forms of organization include sole proprietorships, partnerships, subchapter S corporations, and limited liability companies (LLCs). This report provides a general overview of the tax treatment of the major business types, including sole proprietorships, partnerships, C corporations, subchapter S corporations, and LLCs. Important nontax aspects of each business type are also presented and contrasted where appropriate. This report does not, however, address every issue (tax or otherwise) related to the major business types that could be of interest to Congress. Nor does this report discuss the tax treatment of all the organizational forms available to businesses, such as trusts, regulated investment companies (RICs), and real estate investment trusts (REITs). Interest in the various business types available to U.S. companies has increased recently for several reasons. First, most corporate tax reform proposals offered to date include a reduction in the top corporate rate, which currently stands at 35%. It is often proposed that the revenue loss from a reduced corporate tax rate could be offset (either fully or partially) with the repeal or reduction of certain business tax incentives, formally known as tax expenditures. Pass-throughs, however, could experience a tax increase if such an approach were followed. This is because most business tax incentives are incentives that are available to all businesses, not just corporations. Thus, offsetting a corporate rate reduction by curtailing business tax incentives could negatively impact pass-throughs, which do not pay corporate taxes, and therefore would not benefit from the corporate rate reduction. Second, a reduction in the top corporate tax rate without a corresponding reduction in the top individual tax rate could lead to an increase in the number of firms that incorporate to take advantage of the more favorable corporate rate structure. In late 2012, the top individual tax rate was increased above the top corporate rate for the first time since 2002 as the result of the American Taxpayer Relief Act of 2012 ( P.L. 112-240 ). Because pass-through income is taxed according to individual rates, a differential between the top corporate and individual tax rates can encourage firms to incorporate. If tax reform results in a corporate rate that is lower than the top individual tax rate, the incentive to incorporate would increase. And third, there have been discussions about moving to a more uniform business tax environment. According to traditional economic theories of taxation there is no reason why otherwise identical businesses should be taxed differently. According to the same theories, when such differences do exist, the result is an inefficient allocation of resources, which occurs at the expense of stronger economic performance. The current tax disparity could be reduced via two general approaches. First, the corporate and individual tax systems could be combined or "integrated" so that corporations were treated similar to pass-throughs. Second, pass-throughs could be subjected to the corporate tax. It is perhaps useful to briefly quantify the business landscape across the various business forms before proceeding. Figure 1 displays the distribution of business tax returns filed in tax year 2013. The Internal Revenue Service (IRS) reports that there were approximately 33.2 million corporate and pass-through tax returns filed. The majority (72%) were sole proprietorships. The next most popular was S corporations (13%), followed by LLCs (7%), and C corporations (5%). Partnerships (excluding LLCs) comprised the smallest share of business returns filed (3%). Figure 2 displays the share of net business income generated by the various business types between 1980 and 2013. The most noticeable trend had been the decline in the share of income generated by C corporations until the mid-2000s. Corporate income then spiked partially in response to the 2004 corporate repatriation tax holiday, before falling during the Great Recession. Since 2008, corporate income trended upward as the economy has recovered. At the same time, the shares generated by S corporations and partnerships have generally trended upward aside from a recent slide in earnings that may be related to cyclical factors. LLCs have also slowly increased their share of business income since 1993, when LLCs first appeared as an option on the partnership tax form (this is discussed in the " Limited Liability Companies " section). Sole proprietorships appear to have possibly decreased in importance as a generator of business income, although it is difficult to conclude whether this decrease is the result of a cyclical downturn followed by a relatively modest recovery toward the end of the sample period, or a more permanent trend. In the end, Figure 2 highlights the fact that pass-throughs are just as significant as corporations when it comes to economic activity. A popular business structure is the corporate form, of which there are two types; C corporations, which are discussed in this section, and S corporations, which are discussed later. C corporations, also known as ordinary corporations, are named for Subchapter C of the Internal Revenue Code (IRC), which details their tax treatment. Businesses incorporate under state law and the exact requirements for incorporation may vary from state to state. Typically, a business must first file articles of incorporation at the state level in order to incorporate. A C corporation is considered to be an entity that is separate from its owners (shareholders) for legal purposes. As a result, shareholders are generally not legally liable for the actions of the corporation. The corporate form of organization allows a business to take advantage of a number of benefits not available with other forms of organization. Specifically, a C corporation is not limited in the number of shareholders it may have, the classes of stocks it may issue, the types of shareholders it may have, or the citizenship of its shareholders. This is in contrast to the S corporations, which are limited to one class of share they may offer, the types of shareholders, and the citizenship of their shareholders. Shares of C corporation stock are also traded on well-developed exchanges, which allows ownership interests to be transferred readily and at low transaction costs. As a result, C corporations have the ability to raise capital globally from a variety of investors. For tax purposes, the distinguishing feature of a C corporation is that it is a taxable entity. A corporation's business income is subject to taxation at the corporate level according to the corporate income tax rate schedule. Any after-tax income that is then distributed to shareholders in the form of dividends or recognized as capital gains is taxed again at individual rates. This extra layer of taxation gives rise to what is known as the "double taxation" of corporate profits. Because a corporation itself is a taxable entity and directly responsible for paying taxes, taxable income is computed at the corporate level. A corporation begins by aggregating all sources of business income to arrive at total income. Income sources include sales revenue, investment income, royalties, rents, and capital gains. To arrive at taxable income, the corporation then deducts business expenses and other special deductions. Deductions include such things as salaries and wages, bad debts, depreciation, advertising costs, and a portion of domestic production activities, among others. Corporations are also allowed to deduct interest paid to bond holders (but not dividend payments made to shareholders). As a result, corporations may rely more on debt financing than they otherwise would. Like individuals, a corporation may be required to compute its income tax liability twice, once according to the regular corporate tax, and again according to the corporate alternative minimum tax (AMT). A corporation must pay the higher of the two taxes. The AMT is designed to guarantee that corporations are subject to a minimum rate of taxation by limiting the degree to which tax deductions and credits may be used to calculate tax liability. A sole proprietorship is a business owned by a single individual and that is treated as identical with its owner for tax and legal purposes. The sole proprietorship is the most common and basic form of business organization. Unlike some other forms of business organization, a sole proprietorship does not limit its owner's liability. The business assets of the proprietorship as well as the personal assets of its owner may be used to settle any legal judgment against the business. In contrast, the limited liability protection provided by some other forms of business protects, to a certain degree, the personal assets of the business owners from judgments against the firm. The business income of a sole proprietorship is reported on a Schedule C attached to the owner's individual income tax return. The income is then taxed at the applicable individual income tax rates. Taxable business income includes net profits distributed to the owner as well as retained earnings. In addition, a sole proprietor is responsible for paying the self-employment tax. The self-employment tax rate is 15.3% and is composed of two parts: a Medicare tax (2.9%) and a Social Security tax (12.4% only on the first $127,200 in 2017). Since 2013, an additional Medicare tax of 0.9% applies to wage, compensation, and self-employment income exceeding $250,000 for married joint filers, $125,000 for married separate filers, or $200,000 for all other filers. The self-employment tax is analogous to the combined employer's and employee's share of the Social Security and Medicare taxes, half of which is a payroll tax withheld by most employers.