Small business income tax rules

How you structure your small business will affect your tax burden.

When individuals are responsible for small business income tax

The simplest small business structure is a sole proprietorship. For income tax, the sole proprietorship owner accounts for the money they made or lost in the business on their personal tax return.

A partnership, for which there are two or more owners, is considered a pass-through entity. Earnings and losses are passed through the company to the individual owners. Each individual in the partnership declares their earnings or losses as part of their personal income tax return.

A Limited Liability Company (LLC) structure protects the personal assets of its owners in the case of bankruptcy or lawsuits. The profits and losses of an LLC are passed through to the personal income tax returns of any owners.

How to file small business taxes with no income

It often takes a while before a new business is generating any income. If your small business is taxed as a sole proprietorship, partnership or non-corporate LLC, you may not need to file income taxes if there was no income. It’s always best to consult with a tax expert. M&T’s Business Banking Specialists can connect you to vetted professionals that can help you understand the tax rules specific to your state and business structure.

Classifying as a corporation

For some LLC owners, it’s advantageous to classify as a corporation. By doing so, you don’t have to declare all the business income on your personal tax return. You also don’t have to pay self-employment tax. However, LLCs that are taxed as corporations must file a federal tax return annually even if there is no income or business activity.

Unrelated business income tax for not-for-profits

Not-for-profit companies that have obtained tax-exempt status from the IRS do not have to pay federal income tax on income related to the charitable, educational or other public-benefit service the company provides. If there is income separate from the tax-exempt status, the company would be liable for unrelated business income tax.


Preparing Taxes

Keeping your financials organized and up-to-date are important parts of starting a business. Consult our resources for insight on how to get prepared. Learn more about Preparing Taxes

Partner with M&T Bank

M&T’s Business Banking Specialists are ready to offer you support at any stage of your business. Get to know the advantages of being an M&T Business Banking client. 

This article is for informational purposes. It is not designed or intended to provide financial, tax, legal, investment, accounting, or other professional advice since such advice always requires consideration of individual circumstances. Please consult with the professionals of your choice to discuss your situation.