A business can operate under several structures, each with different tax and liability rules. The structure determines how income is reported, how owners are taxed, and what records must be kept.
Sole Proprietorship
A sole proprietorship is an unincorporated business owned by one person. The business and the owner are legally the same. All profits and losses flow directly to the owner’s Form 1040 using Schedule C. The owner is personally liable for all business obligations. (IRS‑verified: Pub. 334; IRS.gov “Sole Proprietorships”)
Qualified Joint Venture
A married couple filing jointly may elect to be treated as two sole proprietors instead of a partnership if both materially participate and the business is not formed as an LLC or partnership under state law. Each spouse reports their share of income and expenses on separate Schedule C forms.
Limited Liability Company
An LLC is created under state law. Members generally have liability protection. • A single‑member LLC is a disregarded entity by default unless it elects corporate taxation. • A multi‑member LLC is a partnership by default unless it elects corporate taxation. (IRS‑verified: IRS.gov “LLC Filing as a Corporation or Partnership”)
Partnership
A partnership exists when two or more persons carry on a business together. The partnership files Form 1065, and income passes through to partners on Schedule K‑1. General partners are personally liable for debts.
Corporation
A corporation is a separate legal entity. A C corporation files Form 1120 and pays its own tax. Shareholders pay tax again on dividends. An S corporation avoids double taxation by electing pass‑through treatment and filing Form 1120‑S.
Trusts and Estates
Trusts and estates are separate tax entities created by law or by will. They file their own returns and follow distinct rules for income and distributions.
Employer Identification Number
A business must obtain an EIN if it:
- Has employees
- Files employment or excise tax returns
- Maintains a qualified retirement plan
- Operates as a corporation, partnership, estate, or non‑grantor trust
Recordkeeping Requirements
To deduct expenses, a business must keep records that show the amount, date, place, and business purpose. Written or electronic evidence is preferred. Receipts are generally required unless the expense is under $75 (not including lodging).
A canceled check alone is not proof of a business expense. A log, diary, or digital record kept close to the time of the expense carries the most weight.
Special Documentation Rules
Travel: cost, dates, destination, business purpose. Gifts: cost, date, business relationship. Transportation: mileage, cost of vehicle, business miles, total miles.
Record Retention
Businesses must keep records until the period of limitations expires. • 3 years for most returns • 6 years if income is underreported by more than 25% • No limit for fraud or unfiled returns • 7 years for worthless securities claims Employment tax records must be kept at least 4 years.
Property records must be kept until the property is sold and the tax year is closed, including records for assets received in nontaxable exchanges.