Choose A Legal Status: Federal Income Taxation Of Corporations

Generally speaking, the IRS recognizes four major types and several minor types of corporations for the purposes of federal income taxation of corporations.  However, from the point of view of your corporation, there is no room for mechanical thinking.  No one type is always better than the others.  The issues surrounding your corporation related to liability, taxation and record-keeping will largely determine the legal status you choose.

Legal Status Choices

The most common business in the United States today is the sole proprietorship.  Almost all small businesses fall under this business format whereby the entire business falls under the absolute control of the owner.  Generally speaking, sole proprietors will pay taxes on self-employment income.

The partnership is the next most common small business in the country. It is like a sole proprietorship with the major difference that the company falls under the control of two or more partners rather than a single owner. Each individual partner is subjected to self-employment income tax.

Corporations and limited liability companies (LLCs) are the two final choices. Small businesses may choose to register as corporations in order to have business earnings taxed at the corporate tax rate as opposed to the self-employment tax rate. Whether this is beneficial in the case of your business depends entirely on the way in which the business is run. Corporations are taxed at generally lower rates, but require extra record-keeping costs in order to remain legal according to IRS regulations.

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