Part 3 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process
With tax season upon us, we thought it particularly appropriate to outline the basics of how the entities outlined in Part Two are generally taxed on their profits and losses.
Income, expenses, and losses of limited partnerships pass through the entity to the partners and are reported on their respective individual tax returns according to their proportionate interest in the partnership. The partnership pays no income tax itself, but is required to file an annual informational tax return.
Corporations that have not made an election to be taxed under subchapter S of the Internal Revenue Code, on the other hand, do not have such “pass through” status and are required to pay their own taxes on profits. As such, they are required to file their own tax returns separately from their shareholders. Because of this additional layer of tax, shareholders end up being taxed twice on income – once initially on the corporation’s profit and then again when dividends are distributed.
Limited Liability Companies
Limited liability companies are not taxed themselves and profits and losses pass through to their members. Members report profits and losses on their individual returns in the same manner as the limited partnerships above. Although the limited liability company itself is not taxed, it is still required to file an informational return.
The information above is simple for a reason. It is not intended to act as a single source guide to assist in the preparation of your taxes, but rather general guideposts which may assist you in selecting the most appropriate type of entity for your business. Many factors, including specific elections made by the company, will affect tax payment and reporting obligations. You should contact your accountant or tax lawyer with specific questions about your business.