Partnership profits are passed through to the partners, who then individually submit a
Form 1099 received from the partnership with a Schedule E. They must also file and in-
formational Form 1065 that the IRS uses to determine if the partners are filing correctly.
In addition, they must file a Schedule K-1 that breaks down each partner’s share of profits
or losses.
The newer hybrid limited liability company (LLC) is a bit more complex. Business
owners who elect to be treated as a corporation must file either a Form 1120 or 1120S and
a Form 8832, Entity Classification Election, and elect to be taxed as a corporation. LLCs
are automatically treated as a partnership when there is more than one owner unless they
file to be treated as a corporation.
Standard corporations, also known as C corporations, file a Form 1120 and face the
risk of double taxation. Income taxes are paid first at the corporate level. However, cor-
porate income distributed to individuals as dividends are also subject to taxes as personal
income. The less formal S corporation is a bit more relaxed in that income is passed
through to individual shareholders in a similar fashion as partnerships. Taxes aren’t paid
at the corporate level, but passed through and paid on the individual level.
Confused? You’re hardly alone. Welcome to the baffled majority. Income taxes are
enough to make your head swim in a sea of convoluted tax codes. Tax codes are designed
as much for generating revenue for the government as they are for manipulating credits,
loopholes, and deductions in an effort to avoid paying too much. Navigating the United
States’ innumerable-page tax code is well beyond the average scope of the typical musi-
cian, or normal human being, for that matter, and the main reason why an army of pin-
stripe-clad, calculator-toting accountants flourish.