The IRS does not have a specific definition of a “small business” for tax purposes. Instead, the IRS categorizes businesses based on their legal structure and size, and each type of business entity has its own tax rules and reporting requirements.
Here are the common types of business entities recognized by the IRS…
- Sole Proprietorship – A business owned and operated by one individual. The owner reports business income and expenses on their personal tax return using Schedule C.
- Partnership – A business owned by two or more individuals who share profits and losses. Partnerships file an informational return (Form 1065) with the IRS, but the income and losses are passed through to the individual partners, who report them on their personal tax returns.
- Limited Liability Company (LLC) – An LLC is a business structure allowed by state statute that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability protection of a corporation. LLCs can choose how they want to be taxed – as a disregarded entity, partnership, S-corporation, or C-corporation.
- S Corporation – An S Corporation is a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. S Corporations file an informational return (Form 1120-S) with the IRS, and shareholders report their share of income or loss on their personal tax returns.
- C Corporation – A C Corporation is a separate legal entity owned by shareholders. C Corporations pay taxes at the corporate level, and shareholders are taxed on any dividends or distributions received. C Corporations file a separate tax return (Form 1120) with the IRS.
The IRS applies different tax rules and thresholds based on the type of business entity, such as tax rates, deductions, credits, and reporting requirements. There are also various tax incentives and benefits available to small businesses, regardless of their legal structure.
While the IRS does not have a universal definition of a small business, many tax benefits and incentives are designed to assist businesses with relatively low levels of revenue or assets. Certain programs and tax credits may specifically target small businesses to help them grow and succeed.