First and Second Year US Business Taxes for Founders

Step 1: Your Entity Type Decides Which Form You File

The first thing the IRS cares about is how your entity is taxed, not what it is called on paper. An LLC (Limited Liability Company) is a state-level legal structure. The IRS does not have an LLC tax category at all. It taxes your LLC as one of four things: a sole proprietorship, a partnership, a C-corporation, or an S-corporation.

By default, a single-member LLC is taxed as a disregarded entity, which is IRS shorthand for a sole proprietorship. Income flows directly to the owner's personal return. A multi-member LLC defaults to partnership taxation. Either type of LLC can elect to be taxed as a C-corp or S-corp by filing Form 8832 (entity classification) and Form 2553 (S-corp election).

Federal Tax Returns by Entity Type

Each tax classification has its own form, its own deadline, and its own way of charging tax. Start with the at-a-glance view below, then read the walk-through of each row.

Single-member LLC. You report business income on Schedule C, attached to your personal Form 1040. There is no separate business return. Net profit is also hit with self-employment tax on Schedule SE, currently 15.3% on the first roughly $176,000 of earnings, then 2.9% above that for Medicare.

Multi-member LLC. You file Form 1065 by March 15. The partnership itself does not pay federal income tax. Instead, it issues a Schedule K-1 to each member, a one-page form that shows the member's share of profit and loss. Each member then reports that share on their personal return. Active members typically owe self-employment tax on their share.

C-Corporation. The company files Form 1120 by April 15 and pays a flat 21% federal corporate tax on its taxable income. Whatever the company keeps after tax can later be distributed as a dividend, which is taxed again on the owner's personal return. This second layer is what people mean when they say double taxation.

S-Corporation. The company files Form 1120-S by March 15. Just like a partnership, the S-corp itself does not pay federal income tax. Profits flow through to shareholders on a Schedule K-1. The trade-off: any owner who works in the business must pay themselves a reasonable salary through W-2 payroll, which means quarterly Form 941, annual Form 940, W-2s in January, and state payroll registrations.

Foreign Owners Add an Entire Extra Layer

If any of your owners is a non-US person, you have new filings to worry about, even if your entity had zero income in its first year. This is where foreign founders most often get caught off guard.

Foreign-owned single-member LLC. Since 2017, every foreign-owned single-member LLC must file Form 5472 to report reportable transactions with the foreign owner, including the original capital contribution. Even with zero revenue, the act of forming the LLC and putting money into it counts as a reportable transaction.

Foreign-owned C-Corporation. The corporation files Form 1120 and pays the 21% federal rate. When the company pays a dividend to a non-US shareholder, it must withhold 30% of the dividend and remit it to the IRS as FDAP (Fixed, Determinable, Annual, or Periodical) income.

Foreign partner in a US partnership. The partnership has to withhold US tax on the foreign partner's share of US business income, then file Forms 8804 and 8805 each year. The IRS calls this Effectively Connected Income, or ECI. It is one of the most complex areas of US international tax. Many foreign founders avoid the partnership structure for this reason alone, choosing either a single-member LLC or a C-corporation instead.

Salary vs Distribution vs Dividend: How Founders Get Paid

How you take money out of your business can change your total tax bill more than which state you formed in. Each entity type has its own rules for what "paying yourself" looks like on paper.

C-Corporation owner. A W-2 salary is a deductible expense for the company and reduces the 21% corporate tax. The salary then becomes ordinary income for you, plus payroll taxes. A dividend, by contrast, is paid out of after-tax profits with no deduction, then taxed again on your personal return at qualified dividend rates of 0%, 15%, or 20%. For most small C-corps, salary is cheaper than dividends because it dodges the second layer of tax.

S-Corporation owner. Owners who work in the business must pay themselves a reasonable salary through W-2 payroll. Anything above that can be taken as a distribution, which is not subject to Social Security or Medicare tax. On $100,000 of profit, the right salary and distribution split can save thousands of dollars in payroll tax.

LLC member or partner. If your LLC is taxed as a partnership or sole proprietorship, owner draws are not salary. You cannot put yourself on payroll the way an S-corp or C-corp owner can. Your entire share of net profit is subject to self-employment tax, the same 15.3% on the first roughly $176,000 plus 2.9% Medicare above that. For higher-income owners, this is exactly why many switch to an S-corp election in Year 2.

State Taxes: Where You Form vs Where You Operate

Federal tax is only half the story. Every state has its own corporate tax system, its own annual report, and its own deadlines. You can owe taxes in more than one state at the same time.

Where you form. Forming in Delaware, Wyoming, or Nevada changes your state-level obligations, not your federal ones. Delaware charges a $300 LLC franchise tax due June 1, plus a separate corporate franchise tax for C-corps starting at $175 (Authorized Shares method) or $400 (Assumed Par Value Capital method) due March 1. Wyoming has no state corporate income tax and no personal income tax. California, by contrast, charges a flat $800 minimum annual franchise tax for every LLC and corporation doing business in the state, even with zero income.

Where you operate. The state where you do the work, where your employees sit, where your customers are billed, can create what tax pros call nexus. Nexus means you owe state tax there too, regardless of where you formed. A Delaware LLC run entirely from California still owes California's $800 minimum tax. A Wyoming LLC selling to customers in New York may owe sales tax registration in New York.

The lesson: pick your formation state for legal reasons, such as privacy, court system, or registered agent options, not as a tax shelter. The state where you operate is usually where most of your tax liability lives.

No Revenue Yet? You Probably Still File

A common first-year mistake: "We had no revenue, so we did not file anything." For most entity types, that is wrong, and the penalties for not filing can be far larger than any tax owed.

Year 1 vs Year 2: What Actually Changes

Year 1 looks different from Year 2 in three meaningful ways. Plan for these in your second year so nothing catches you off guard.

1. 1Estimated tax payments. In Year 1, most founders pay nothing during the year because there is no prior-year baseline. Starting in Year 2, the IRS expects quarterly estimated payments if you expect to owe more than $1,000 in personal tax, or $500 for a C-corporation. Calendar-year due dates: April 15, June 15, September 15, and January 15 of the following year.
2. 2Payroll filings. If you paid yourself a salary or hired anyone in Year 1, you now have payroll filings every quarter going forward. Form 941 is due quarterly, on April 30, July 31, October 31, and January 31. Form 940 for federal unemployment is due annually by January 31. State payroll filings stack on top, including state withholding tax and SUTA, the state unemployment tax, in every state where you have employees.
3. 3State annual reports. Most states require an annual report filing, separate from the income tax return. Delaware, California, Florida, and most other formation states have a fixed due date that repeats every year. Missing it can put your LLC into not in good standing status, blocking bank account changes, contract signings, and even payment processor approvals.

Federal Filing Calendar at a Glance

This is the typical calendar-year federal schedule, before any extensions. State deadlines are separate and usually earlier than you expect.

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