Anyone who operates a business or plans to start one must understand how businesses are taxed. Taxes are among the highest costs a business incurs. If they are not planned for or if the rules are not followed, the results can be devastating.
In this article, we will discuss the types of business entities, how they are taxed, which tax returns they must file, and when they must be filed.
Fortunately, the State of Nevada does not have an income tax on businesses or individuals. There are, however, employment taxes as well as a commerce tax in Nevada, and other states have various types of taxes.
A qualified tax expert in your area should be consulted regarding the state taxing requirements a business may be subject to in Nevada.
How Are Businesses Taxed?
The Internal Revenue Service (IRS) recognizes five entities for tax purposes. There are many advantages and disadvantages to each type, which can be found in the comparison table below. Our focus will be on the tax ramifications of each.
Before you decide which one to use, evaluate the advantages and disadvantages, and be sure to consult a small business expert to determine the proper form and an attorney to ensure all the necessary paperwork is in order to set it up.
Selecting the proper business form is the single most important tax consideration a new business can make, and it should be selected prior to beginning operations.
Understanding Pass-Through vs. Entity-Level Taxation
First, it’s important to understand the two fundamental approaches to business taxation: pass-through taxation and entity-level taxation.
Pass-Through Taxation
With pass-through taxation, the business itself does not pay income tax. Instead, all profits and losses “pass through” to the owners’ personal tax returns. The owners then pay taxes at their individual tax rates. This approach avoids double taxation but may result in owners paying taxes on income they haven’t actually received in cash (if profits are retained in the business).
Pass-through entities include:
- Sole Proprietorships
- Partnerships
- S Corporations
- LLCs (depending on tax election)
Entity-Level Taxation
Under entity-level taxation, the business pays corporate tax on its profits at the corporate tax rate. If those profits are then distributed to shareholders as dividends, the shareholders pay tax again on their personal returns. This is often referred to as “double taxation.”
However, entity-level taxation can be advantageous for businesses that plan to retain earnings for growth rather than distribute them to owners.
Entity-level taxation applies to:
- C Corporations
5 Business Entity Types
Let’s examine how each of the five primary business entities are taxed, along with their key advantages and considerations.
1. Sole Proprietorship
A sole proprietorship is the simplest and most common form of small business ownership. A single person owns the business and assumes all risks and rewards of operations. The owner is not considered an employee of the company.
The business itself does not pay taxes. Because the owner and the business are considered one and the same for tax purposes, the owner pays income tax on any profit. This profit is included with other income sources on the owner’s personal tax return (Form 1040), and the total taxable income determines the individual tax rates that apply.
Filing Requirements
- Schedule C (Profit or Loss From Business) attached to Form 1040
- Due date: April 15th (six-month extension available)
- Quarterly estimated tax payments may be required
Learn more: How Are Sole Proprietorships Taxed?
2. Partnership
A partnership exists when two or more persons join together to carry on a trade or business, with each person contributing money, property, labor, or skill and expecting to share in the profits and losses. Partnerships can be general partnerships, limited partnerships, or limited liability partnerships.
Like sole proprietorships, partnerships are pass-through entities. The partnership itself does not pay income tax. Instead, each year the partnership’s profit or loss “passes through” to the individual partners, who report their share on their personal tax returns based on their ownership percentage or the terms of the partnership agreement.
Filing Requirements
- Form 1065 (U.S. Return of Partnership Income) – an information return
- Schedule K-1 provided to each partner showing their share of income, deductions, and credits
- Due date: March 15th (six-month extension available)
- Partners may need to make individual estimated tax payments
Learn more: How Are Partnerships Taxed?
3. Limited Liability Company (LLC)
The Limited Liability Company has become a popular choice for small business owners because it combines the liability protection of a corporation with the tax flexibility of a partnership. LLCs are generally easier to set up and maintain than corporations, requiring only articles of organization filed under state law.
One of the unique aspects of an LLC is the ability to choose its tax treatment. By default, the IRS taxes a single-member LLC as a sole proprietorship and a multi-member LLC as a partnership.
However, an LLC can elect to be taxed differently:
- As a Sole Proprietorship: For single-member LLCs (also known as “disregarded entities”)
- As a Partnership: Default for multi-member LLCs
- As an S Corporation: By filing Forms 8832 and 2553
The primary tax advantage of an LLC comes when it elects S Corporation tax treatment. This election can minimize self-employment taxes because S Corporation profits are not subject to Social Security and Medicare taxes (though owner-employees must take a reasonable salary, which is subject to payroll taxes).
Learn more: How Are LLCs Taxed?
4. S Corporation
An S Corporation is a special type of corporation that combines the legal liability protection of a C Corporation with pass-through tax treatment similar to a partnership. A business must specifically elect to be treated as an S Corporation by filing Form 2553 with the IRS, and specific rules apply to maintain this designation.
Like partnerships, S Corporations are pass-through entities that do not pay taxes at the entity level. Each year, the profit or loss of the S Corporation passes through to the individual shareholders based on their percentage of ownership. Shareholders pay taxes on their personal returns using their individual tax rates.
Filing Requirements
- Form 1120S (U.S. Income Tax Return for an S Corporation)
- Schedule K-1 provided to each shareholder
- Due date: March 15th (six-month extension available)
- Shareholders may need to make individual estimated tax payments
Learn more: How Are S Corporations Taxed?
5. C Corporation
A C Corporation is the default classification for corporations formed under state law. C Corporations are separate legal entities from their owners and can have unlimited shareholders. This allows businesses to seek outside investment or who are planning to go public.
Unlike pass-through entities, C Corporations pay taxes at the corporate level. The current federal corporate income tax rate is a flat 21%. If profits are distributed to shareholders as dividends, those shareholders pay tax again on their personal returns—this is the “double taxation” often associated with C Corporations.
Filing Requirements
- Form 1120 (U.S. Corporation Income Tax Return)
- Due date: April 15th (six-month extension available)
- Quarterly estimated tax payments required if tax liability exceeds $500
Learn more: How Are C Corporations Taxed?
Business Entity Comparison at a Glance
The following table provides a quick comparison of key tax characteristics for each business entity type:
| Feature | Sole Prop. | Partnership | LLC | S Corp | C Corp |
|---|---|---|---|---|---|
| Tax Level | Personal | Personal | Varies* | Personal | Corporate |
| Self-Employ. Tax | Yes | Yes | Varies* | No** | No |
| Double Taxation | No | No | Varies* | No | Yes |
| Primary Tax Form | Sch. C | 1065 | Varies* | 1120S | 1120 |
| Filing Deadline | Apr. 15 | Mar. 15 | Varies* | Mar. 15 | Apr. 15 |
*LLC tax treatment depends on election: sole proprietorship, partnership or S corp.
**S Corp shareholders avoid self-employment tax on distributions but must take a reasonable salary subject to payroll taxes.
Which Entity Is Best for Your Business?
From the discussion above, it should be apparent that the best form of business is the one that best suits the company’s purpose and should take into account all factors, not just taxes.
That said, from a tax perspective, the most important decision a new business can make is how it wants to be taxed.
This decision should be made with the help of a competent, qualified small business and tax consultant, such as a Certified Public Accountant (CPA) who can guide the new business owner to the appropriate solution.
Once a decision on the form has been reached, a business attorney should be consulted to make sure the proper paperwork is in place to formalize the selection.
Key Factors to Consider
- Liability Protection: Do you need to protect personal assets from business debts and lawsuits? Corporations and LLCs provide liability protection; sole proprietorships and general partnerships do not.
- Tax Efficiency: What’s your expected profit level? S Corporation elections can save self-employment taxes for profitable businesses, while C Corporation rates may benefit businesses retaining significant earnings.
- Administrative Burden: How much paperwork and compliance are you willing to handle? Corporations require more formalities than sole proprietorships or LLCs.
- Future Plans: Do you plan to seek outside investment or eventually sell the business? C Corporations offer more flexibility for raising capital.
- Number of Owners: Will you have partners or investors? S Corporations have restrictions on the number and type of shareholders.
Nevada Business Taxation
So far, the discussion has focused on Federal business taxation. While Nevada does not have an income tax on individuals or businesses, there are several taxes that Nevada business owners should be aware of.
Unemployment Tax
All businesses that have employees have to pay Unemployment Tax in Nevada. This is the business’s sole responsibility. It is a payroll tax determined on gross wages paid (up to $43,700 in 2026) annually.
This is a payroll tax, and the business owner should consult a payroll company for help calculating the tax and filing requirements.
Modified Business Tax
This is also a payroll tax. All Nevada businesses that pay more than $50,000 in wages in a quarter must pay the tax on the amount over the threshold. A return must be filed even if the wages are less than $50,000, but no tax will be owed.
This is also a payroll tax for which a payroll company should be retained to ensure compliance.
Commerce Tax
This is basically a franchise tax imposed for the privilege of doing business in Nevada. It only applies to businesses that have gross revenue in excess of $4,000,000 annually. There is no filing requirement if gross revenue is less than that figure and thus no tax owed.
Be aware that the tax is calculated on a fiscal year that runs from July 1 through June 30 of the following year, not a calendar year.
Local Taxes
Various municipalities and counties may also assess their own taxes. Sales tax applies to any business that sells goods (not services). There may also be property taxes assessed on businesses
Get Expert Tax Guidance for Your Business
Taxes are one of the highest costs your business will incur. Making the right decisions about your business structure and tax strategy can save you thousands of dollars and help you avoid costly mistakes.
Ready to optimize your business tax situation? Schedule a consultation to discuss your specific situation and learn how we can support your business success.