Tax Considerations Between Business Entity and Tax Treatment of Pass-Through Entities

Federal Income Tax
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Federal Income Tax Identify and Differentiate Tax Considerations Between Business Entity Type When starting a business, an individual must decide on the appropriate type of entity to register. There are diverse options that have differing federal income tax implications. The main types of businesses include sole proprietorship, partnerships, limited liability companies, and corporations. The business entity and the owners have similar legal obligations for a sole proprietorship. From the records of the IRS, the owner takes all liabilities accrued to the business (Mathias, n.d.). All the income, liabilities, and assets are directly allocated to the owner. Another form of business is partnerships, which is similar to sole proprietorships. The business owners have legally distributed all the entity's income, assets, and liabilities. However, taxation is usually applied to the income of the different individuals (Chiappinelli, 2022). Therefore, income is generally reported as distributed to the individual partners. Thus, the federal tax is applied to the income of each individual. A limited liability company (LLC) is another business type. The entity is usually regarded as a separate legal entity from the owner. However, in federal taxation, LLCs are generally treated like partnerships unless they choose to be considered corporations (Chiappinelli, 2022). Therefore, there is an option of having pass-through taxation. This is where the LLC does not incur any tax, but the individual members are taxed on the income. The income and loss are reported on the owners' tax filing, paying any due taxes as individuals. Another business type is the C corporation, regarded as a separate legal entity. Therefore, it is subjected to corporate income tax based on the corporate tax rates. Moreover, the C corporation income is subjected to double taxation when the entity owners receive their dividends. In this regard, the corporation is taxed on its revenue and subsequently the owners after receiving their profit share (Huston, 2020). Finally, the S corporation usually has special considerations with the taxation authority to be regarded as an LLC or partnership. T...