US Tax Classification By Business Entity Type-Detailed Guide 2025

In the United States, the way your business is taxed depends largely on its entity structure. Whether you’re a sole proprietor, partnership, LLC, S corp, or C corp, the US tax classification affects your filing requirements, deductions, and personal liability.

Understanding how the IRS classifies each entity is crucial to choosing the right business structure and staying compliant with U.S. tax laws.

Overview of US Tax Classifications by Entity Type

Business Entity	Tax Classification	IRS Form(s)
Sole Proprietorship	Disregarded Entity	Form 1040 + Schedule C
Partnership	Pass-through Entity	Form 1065 + K-1s to partners
Limited Liability Company (LLC)	Depends on election (default or chosen)	Varies – 1040, 1065, 1120S, or 1120
S Corporation	Pass-through Corporation	Form 1120S + K-1s to shareholders
C Corporation	Separate Taxable Entity (Double Taxation)	Form 1120
Nonprofit (501(c)(3))	Tax-Exempt Entity	Form 990 (various versions)
Single-Member LLC	Disregarded Entity (default)	Form 1040 + Schedule C
Multi-Member LLC	Partnership (default), S Corp or C Corp (elective)	Form 1065, 1120S, or 1120
Foreign Corporation	U.S. Taxable Entity (if engaged in trade/business)	Form 1120-F

1. Sole Proprietorship

US Tax Classification: Disregarded Entity

A sole proprietorship is the simplest and most common form of business structure in the United States. It is an unincorporated business owned and operated by one individual, where there is no legal distinction between the owner and the business.

A sole proprietorship is not separate from the owner for tax purposes.

• Files: Form 1040 with Schedule C
• Self-employment taxes apply
• No separate business tax return
• Simple and cost-effective to operate

Ideal for freelancers, consultants, and single-owner businesses.

2. Partnership

US Tax Classification: Pass-through Entity

A partnership is a business structure where two or more people share ownership, profits, and responsibilities. It can be formed with a simple agreement and does not require incorporation.

For tax purposes, a partnership is a pass-through entity—the business itself doesn’t pay income tax. Instead, profits and losses “pass through” to the partners, who report them on their individual tax returns using Schedule K-1. Partnerships must file an informational return (Form 1065) with the IRS each year.

Partnerships don’t pay income tax themselves. Instead, profits and losses pass through to individual partners.

• Files: Form 1065
• Each partner receives a Schedule K-1
• Partners report income on Form 1040
• Subject to self-employment tax

Used when two or more individuals co-own a business without forming a corporation.

3. LLC (Limited Liability Company)

Limited Liability Company (LLC) is a flexible business structure that combines the liability protection of a corporation with the tax simplicity of a sole proprietorship or partnership. Owners of an LLC are called members.

For taxation, a single-member LLC is treated as a sole proprietorship by default, and a multi-member LLC is taxed as a partnership—both are pass-through entities, meaning profits pass through to the owners’ personal tax returns. LLCs can also elect to be taxed as an S corp or C corp, offering additional tax planning options.

LLCs are flexible entities and can be taxed in multiple ways depending on elections made with the IRS.

Default Tax Classifications:

• Single-Member LLC: Treated as a sole proprietorship
• Multi-Member LLC: Treated as a partnership

Elective Options:

• File Form 8832 to elect C Corporation status
• File Form 2553 to elect S Corporation status

LLCs combine liability protection with tax flexibility, making them a popular structure.

4. S Corporation

US Tax Classification: Pass-through Corporation

An S Corporation (S Corp) is a special type of corporation that provides liability protection like a regular corporation but allows income to be passed through to shareholders to avoid double taxation.

For tax purposes, an S Corp does not pay federal income tax at the corporate level. Instead, profits and losses pass through to shareholders, who report them on their personal tax returns. S Corps must file an informational return (Form 1120S) and issue Schedule K-1 to shareholders.

S Corps avoid double taxation by allowing profits (or losses) to pass through to shareholders’ personal tax returns.

• Files: Form 1120S
• Shareholders receive a Schedule K-1
• Shareholder-employees must be paid a reasonable salary
• Distributions not subject to self-employment tax

Requires election via Form 2553 within a strict timeline after formation or the start of a tax year.

5. C Corporation

US Tax Classification: Separate Taxable Entity

A C Corporation (C Corp) is a legal business entity separate from its owners, providing liability protection to shareholders. It can have unlimited shareholders and issue multiple classes of stock.

For taxation, a C Corp pays corporate income tax on its profits at the corporate level. When profits are distributed as dividends to shareholders, those dividends are taxed again on the shareholders’ personal tax returns—resulting in double taxation. The C Corp files Form 1120 annually with the IRS

C Corps pay corporate income tax on their earnings. Dividends paid to shareholders are taxed again, leading to double taxation.

• Files: Form 1120
• Subject to flat corporate tax rate (21%)
• Owners only pay taxes on dividends or wages

Ideal for businesses seeking venture capital, issuing stock, or scaling nationally.

6. Nonprofit Organization (501(c)(3))

US Tax Classification: Tax-Exempt Entity

A nonprofit organization is an entity formed to pursue a mission or public benefit, rather than to make profits for owners or shareholders. Common examples include charities, educational groups, and religious organizations.

Nonprofits can apply for tax-exempt status (like 501(c)(3)) which means they are generally exempt from federal income tax on earnings related to their mission. However, unrelated business income may be taxable. Nonprofits must follow strict rules to maintain their tax-exempt status and file annual informational returns (Form 990).

It is recognized under Section 501(c)(3), these organizations operate exclusively for charitable, religious, or educational purposes.

• Files: Form 990, 990-EZ, or 990-N
• Donations are tax-deductible for contributors
• Must not benefit private interests or shareholders

Requires IRS approval via Form 1023.

7. Foreign Corporation

Tax Classification: U.S. Taxable Entity (if applicable)

A foreign corporation is a company that is incorporated outside the United States but does business or earns income within the U.S. It can be either a foreign-owned U.S. subsidiary or a foreign company operating in the U.S.

For tax purposes, a foreign corporation is generally subject to U.S. tax only on income effectively connected with a U.S. trade or business, plus certain U.S.-source passive income. It must file U.S. tax returns (usually Form 1120-F) and may also be subject to withholding taxes on certain payments.

Foreign corporations doing business in the U.S. are subject to U.S. taxes on U.S.-sourced income.

• Files: Form 1120-F
• May be subject to branch profits tax
• Complex reporting if involved in U.S. partnerships or subsidiaries

IRS Forms by Entity Type

Form	Used By	Purpose
Form 1040	Individuals, sole proprietors	Personal income tax return
Schedule C	Sole proprietors, single-member LLCs	Business income and expenses
Form 1065	Partnerships, multi-member LLCs	Partnership return of income
Schedule K-1	Partners, S corp shareholders	Reports share of income, deductions
Form 1120	C Corporations	U.S. corporate income tax return
Form 1120S	S Corporations	Income tax return for an S corporation
Form 2553	S Corp Election	To elect S corporation status
Form 8832	Entity Classification Election	To elect C corp or change default status
Form 990	Nonprofits	Annual reporting for exempt orgs

Key Terms to Know

• Pass-through Taxation: Pass-through taxation is a tax system where the business itself does not pay income tax. Instead, profits or losses “pass through” to the owners, who report them on their personal tax returns.

This method is used by sole proprietorships, partnerships, S corporations, and LLCs. It avoids double taxation, which occurs in corporations, and can offer tax advantages—especially when combined with deductions like the Qualified Business Income (QBI) deduction. Business income is taxed on the owner’s personal return, avoiding corporate tax.

• Double Taxation: Double taxation occurs when the same income is taxed twice—first at the corporate level, and again at the individual level when profits are distributed as dividends to shareholders.

This typically applies to C corporations, which pay federal income tax on their profits, and then shareholders pay personal income tax on the dividends they receive. It can lead to a higher overall tax burden compared to pass-through entities. C corps are taxed at the corporate level and again on shareholder dividends.

• Disregarded Entity: A disregarded entity is a business structure that is separate legally from its owner but ignored for federal tax purposes. This means the IRS treats the business and owner as the same taxpayer.

The most common example is a single-member LLC, which is taxed like a sole proprietorship by default. The business does not file a separate tax return—instead, income and expenses are reported on the owner’s personal tax return. However, it still provides liability protection like other formal business entities. A business that is not separate from the owner for tax purposes.

• K-1 Form: Form K-1 is a tax document used to report an individual’s share of income, deductions, credits, and other tax items from a pass-through entity like a partnership, S corporation, or trust.

Each partner or shareholder receives a K-1 from the business, which they use to report their share of the entity’s income on their personal tax return. The business files a copy with the IRS as well. K-1s are key for ensuring taxes are paid appropriately without double taxation at the entity level. It reports an owner’s or shareholder’s share of income in a pass-through entity.

Choosing the Right Tax Classification

When starting a business, choosing the right tax classification is crucial, as it affects how your income is taxed, how you pay yourself, and your filing requirements. The IRS assigns a default classification based on your entity type:

• A sole proprietorship for a single-member LLC
• A partnership for a multi-member LLC
• A C corporation for incorporated entities

However, eligible businesses can elect to be taxed differently by filing specific IRS forms:

• Form 8832 to elect C Corporation status or change to partnership/sole proprietor
• Form 2553 to elect S Corporation status (if qualified)

Each classification has unique tax rules, benefits, and obligations. Choosing the right one depends on factors like income level, owner count, payroll needs, and long-term goals. It’s often wise to consult a tax advisor before making a decision.