Tax Walkthrough: Sole Proprietorships, Partnerships, and Corporations

While most employees look to the month of April as the deadline for filing taxes, for those who own businesses, taxes are a year-round endeavor. If 2021 was the year you started your own business, you may have questions about your tax liabilities. This basic guide will help you distinguish tax guidelines among sole proprietorships, partnerships, and corporations, depending on the type of business structure you have. 

Which type of business do you have?

A sole proprietorship is the simplest type of business structure. In the United States, depending on the state you’re located in, you will not have to file for a business license or other legal documents. Sole proprietorships are unincorporated. In a sole proprietorship, there is no distinction between the business and its owner, as far as taxes are concerned. This means that whatever income you make from the business is yours as the business owner, but it also means that you are personally responsible for the debts and losses the business might incur.

A partnership is a business formed by two or more individuals and is usually documented in a formal agreement. Like a sole proprietorship, income may be passed through to owners as well as debts or losses, as is the case with a general partnership. There are also limited partnerships (LP) and limited liability partnerships (LLP), which serve in different ways to protect partners personally from business debts or losses. 

A corporation is a business structure that, legally, is separate from its owners. That means that the owners cannot be held personally liable for the debts of the business. Corporations, unlike other business entities, do pay income taxes, require the filing of articles of incorporation with the Secretary of State, and are the most costly to set up. Corporations pay taxes on their profits, and shareholders are required to pay taxes on any dividends received. There are different types of corporations (S-Corp, B-Corp, etc.) 

Tax Guidelines for Sole Proprietorships, Partnerships, and Corporations

In general, all businesses - with the exception of partnerships - have to file an annual tax return. Partnerships file an annual information return, and income is reported on the partners’ personal tax returns.

For employees, taxes are taken out of their paychecks automatically. Self-employed individuals, such as sole proprietors, independent contractors, partners, and S-corp shareholders, however, generally pay estimated quarterly taxes. The IRS says that sole props, S-corps, and partnerships should pay quarterly if they expect to owe tax of $1,000 or more. Corporations should pay quarterly if they expect to owe tax of $500 or more. Failure to pay quarterly - or pay less than you owe - may result in an estimated tax penalty.  

The general quarterly tax due dates are as follows:

• January 1 to March 31 (April 15)
• April 1 to May 31 (June 15)
• June 1 to August 31 (September 15)
• September 1 to December 31 (January 15 of the following year)

In the event that a due date falls on a weekend or a legal holiday, the payments would be due the following business day. These dates may not apply to certain corporations, depending on calendar and/or fiscal year.

Tax forms and information for sole proprietors

Sole proprietors must submit the following info to file their taxes:

• Individual tax return (Form 1040)
• Schedule C
• Schedule SE, for self-employment tax. The self-employment tax is 15.3% on the first $142,800 worth of net income (12.4% for Social Security and 2.9% for Medicare).
• Estimated taxes (Form 1040-ES)
• Sales tax, if applicable

Tax forms and information for partnerships

Partnerships must submit the following info to file taxes:

• Annual return of income (Form 1065)
• Schedule K-1 for each partner, to report their share of income, losses, expenses, etc.
• Schedule SE, for self-employment tax.
• Estimated taxes (Form 1040-ES)

Tax forms and information for corporations 

Corporations must submit the following info to file taxes:

• Form 1120, which is used to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a corporation. All domestic corporations must file, regardless of whether they have taxable income - unless exempt.
  • For S-Corps, file Form 1120-S
• Form 1120-W, for estimated taxes. 

Need help filing taxes for your business?

If you’re filing taxes on behalf of your business, it can be a complicated process. To ensure you have all of the information you need, as well as all of the correct documentation, please contact us to plan and file your taxes accordingly. Our tax professionals at Chatterton & Associates can also coordinate with your financial advisors to help minimize your tax liability and avoid possible overpayments. 

Sincerely,

The Team at Chatterton & Associates

Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.