Am I an Owner or an Employee of My Business?
Ownership of a business is not as defined as you may think. You may have established the business, been one of the founders or fronted all the finances for the startup. You may believe that you own the business for tax purposes, but you might want to look at how the Internal Revenue Service (IRS) views ownership before starting your tax preparations.
You are the owner for tax purposes if you are a sole proprietorship, Limited Liability Company (LLC), S Corporation or partnership. In a Corporation, it depends on how you are involved whether you are an owner or an employee for tax reporting.
How a business is owned and taxed may help you decide which form of business is right for you.
The IRS Decides Ownership
The IRS has spelled out in their regulations the way business owners (or employees) are taxed based on the type of business, and the owner's position in the firm. The tax status of the owner should be a major factor in your decision to form a specific type of business.
A sole proprietorship is a business in which you are the only owner. There are no partners involved. A sole proprietor is required to report the business income or losses on their personal income tax.
A partnership is a business in which two or more people have agreed to work together to run a company. Partners are regarded as owners of their business. Partners in this type of business are responsible for reporting the amount of taxable income from the business on their personal income tax.
The amount for partners to file is determined on Form 1065, and a Schedule K-1 should be issued which declares the amount of taxable income to each partner.
Limited Liability Company
A Limited Liability Company (LLC) is a company which is registered with the respective state's office of the Secretary of State.
An LLC protects the owner from personal liability if the business were to fail. This means that your personal assets will not be mixed with your business assets if lenders begin to collect on your business' debts. In this form of business, you are the owner.
An LLC is similar to a sole proprietorship and partnership for tax reporting. A sole owner is taxed via personal income tax, and multiple owners are taxed on their portions of taxable income. However, you can choose to be taxed as a corporation.
A corporation is also registered with the state they operate in. It is regarded as a legal entity, similar to the way in which a person is regarded as a legal entity, and is taxed as an entity.
If you own shares and work in the firm, you are an employee and are responsible for reporting income tax on any salaries, wages, and interest on shares. If you own shares only, you are an owner and pay taxes on distributed profits.
An S corporation is a limited partnership. In this form, you are an owner. You are limited to 100 shareholders or less and are allowed to be taxed as a partnership. Each partner reports their share of the taxable income on their personal income taxes.