Business Tax Overview Surprisingly, some businesses pay income taxes, and some businesses don't.  That's because some entities, called pass-through entities, pass the income through to the owners to pay tax on.  Likewise, some businesses file separate income tax returns, and some don't.  It's all a bit confusing.  This table attempts to explain it in simple terms. Entity Who pays the tax? What tax return gets filed? Sole Proprietorship Individual owner Schedule C which is part of the owner's personal tax return (Form 1040) Partnerhsip Each partner Partnership return (Form 1065)  The profit (or loss) flows through to each partner's personal tax return  and is taxed at the individual level.  In the event that the partnership lost money, the loss flows through and can often be used to offset other income on the partner's personal return.   (See below) Regular Corporation (C Corp) The corporation Corporate return (Form 1120) S Corporation The individual shareholders Corporate return (Form 1120-S)  The profit (or loss) flows through to each shareholder's personal tax return  and is taxed at the individual level.  In the event that the S corp lost money, the loss flows through and can often be used to offset other income on the shareholder's personal return.  See S Corp Taxation for more info. Limited Liability Company (LLC) It depends For LLCs where there is only one member, the LLC can request to be taxed as a C Corp or an S Corp, or do nothing and be taxed as a sole proprietor.  For LLCs with more than one member, the LLC can request to be taxed as a C Corp or an S Corp, or do nothing and be taxed as a partnerhsip.

An important note about pass through entities:  The tax (on the individual's return) is based on the profit earned that year.  It is not uncommon that the profit earned was not distributed to the owner.  Sometimes the profit on the tax return is not actually cash sitting in the bank account, but inventory sitting on the shelves.  Or maybe the profit was used to pay down debt.  There are also other considerations, like distributions in excess of basis or suspended losses that affect the taxes.  It's a bit complicated so it's agood idea to have some professional help.