Tax Entities
In the United States, there are several types of tax entities that can be used for business purposes.
These include:
Sole Proprietorship: This is the simplest and most common type of business structure. It is owned and operated by one individual and there is no legal distinction between the business and the owner. This type of entity is not required to file any tax returns separate from the owner's personal tax return. - On your 1040
Partnership: This type of entity is owned and operated by two or more individuals. Partnerships file an annual tax return and pay taxes on their income, but the income is then passed through to the individual partners and taxed on their personal tax returns. If the only partners are the parents then a child can be paid from a partnership and those wages aren’t subject to payroll taxes. - Form 1065
Limited Liability Company (LLC): An LLC is a hybrid structure that combines elements of both a corporation and a partnership. It offers the personal asset protection of a corporation and the pass-through taxation of a partnership. LLCs can choose to be taxed as a Sole Proprietor (if it’s a Single member LLC) , partnership, S-corp, or C-corp. - 1040, 1065, 1120, or 1120S depending on how it’s chosen to be taxed.
S-Corporation: This type of entity is a small business corporation that elects 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. S- Corp owners are required to be paid as a W2 employee, and if kids are paid via an S-corp the wages are subject to Payroll taxes. - 1120S
C-Corporation: This is the traditional corporation structure, also known as a regular corporation. A C-corp files its own tax return and pays taxes on its income, but the shareholders are also taxed on the dividends they receive. A C-Corp paying children will result int he wages being subject to payroll taxes. -1120
It's important to note that each type of entity has its own set of advantages and disadvantages, and the choice of entity will depend on the specific needs and goals of the business. It's also important to consult with a tax professional or attorney to determine which type of entity is best for your business.