Accepted Answer

Hello XXXXXXXX,

Regardless of what type of business entity you set up, you will never be able to toally just separate your business taxes from your personal taxes.

Here are the various types of business entities you could establish and how they work:

1. Sole proprietorship -- all of the income you earn and your related expenses are simply reported on Schedule C as part of your personal tax return.

2. Single member LLC - treated identical to a sole proprietorship. Single member LLC's are disregarded tax entities, meaning the LLC itself files no tax return. All of the income is reported by the single member, the same as a sole proprietor.

3. Multi member LLC (Partnership) -- The partnership itself files a tax return, but actually pays no tax. The return it files is for informational purposes only to report the income and expenses of the partnership. But the partnership itself then actually issues K-1 forms to each partner to report each partner's share of the income. Each partner then reports that income and pays taxes on his own personal tax return.

4. S Corporation -- The S Corp itself files a tax return, but again this is for informational purposes only. With an S Corp, you are required to pay yourself a salary, and any additional profits flow through to you as dividends. So you report the salary you earned and the dividends you earned on your own personal tax return.

5. C Corporation -- This is the only business entity that actually files a return of its own and pays tax on its profits at the corporate level. But the problem with a C Corporation is that the taxation does not end there. As an owner or officer of the C Corp, you still need to pay yourself a salary and you also receive the additional profits as a dividend. So here again, your salary and dividends are reported on your personal return, and you actually end up being taxed double on the same profits. That is why a C Corp is not desirable.

But there really is no such business entity which will allow you to separate your business income from your other personal income. All business income you earn from any business entity still ends up being reported as part of your personal return.

If this was helpful please press the Accept button.

Thank you tamara

Expert:	Merlo
Pos. Feedback:	99.8 %
Accepts:
Answered:	10/15/2009

Accountant

25+ years tax consulting. Specializing in returns for US citizens living abroad