Our federal tax statute (the Internal Revenue Code "IRC") treats state law business entities either as disregarded or as persons, although not necessarily as taxpayers. There are four tax types under the IRC. If the business is not conducted by an entity, then there is a tax on "income from whatever source derived" which includes all ways that value is received, business and non-business, after certain deductions, credits and the like. If a business is conducted through an entity, the entity may be (1) disregarded, and therefore not be deemed a separate tax person from its single owner, or it may be treated as a tax person and subject to the tax rules under (2) Sub-Chapter C, (3) Sub-Chapter S or (4) Sub-Chapter K.
A proprietorship business (one person "doing business as") is always disregarded as a tax person. Taxable transactions, income and deductions, are entered on a person's individual tax return. Under both Texas and US law, if the business interest is held as community property a married person may elect to treat the couple as partners (with the other spouse's agreement) or as a sole owner. The election must be made up front, and should only be made with an attorney's guidance.
A state law corporation may only be taxed under the rules of either Sub-Chapter C or Sub-Chapter S.
A state law general partnership, including an LLP, has more possibilities. It may be taxed under three of the four tax types: Sub-Chapter C, Sub-Chapter S or Sub-Chapter K. A state law limited partnership may be taxed under two of the four tax types: Sub-Chapter C or Sub-Chapter K.
A state law limited liability company may be taxed under three of the four types, depending on the number of owners:
a single owner limited liability company may be disregarded, may be taxed under Sub-Chapter C, or it may be taxed under Sub-Chapter S.
a multi-owner limited liability company may be taxed under Sub-Chapter C, may be taxed under Sub-Chapter S or may be taxed under Sub-Chapter K.
The entity itself, not the IRS, gets to choose among the choices set forth above as available for each state law entity type.
This memorandum contains general information and while the information presented is accurate as of the date of its publication, it cannot be relied upon as legal advice, as that can only be obtained through personal consultation with an attorney with whom you share your specific facts.
Copyright © 2006 by Sterling A. Minor. All Rights Reserved.
Last Updated: March 14, 2006
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