Quick answer

Report business income on a schedule attached to your individual Form 1040 (most commonly Schedule C) if you are a sole proprietor or a single‑member LLC that hasn’t elected corporate taxation. File a separate entity return — Form 1065 for partnerships, Form 1120 for C corporations, or Form 1120‑S for S corporations — when the business has a separate tax filing requirement.

When to use a schedule (common cases)

When to file a separate business return

  • Partnerships and multi‑member LLCs taxed as partnerships must file Form 1065 and provide K‑1s to owners (IRS: https://www.irs.gov/forms-pubs/about-form-1065).
  • S corporations use Form 1120‑S and issue Schedule K‑1s to shareholders.
  • C corporations file Form 1120 and pay tax at the corporate level.

Why the distinction matters

  • Tax treatment: Entity returns determine how income is taxed (pass‑through vs corporate level) and what tax credits or deductions are available.
  • Reporting: Partnerships and S corps issue K‑1s so owners report their share on personal returns; sole proprietors report everything on their Form 1040.
  • Compliance & deadlines: Separate entity returns have their own filing requirements and may have different due dates and extension rules.

Single‑member LLCs and elections

A single‑member LLC is treated as a disregarded entity by default and its income goes on Schedule C, unless the owner elects to have the LLC taxed as an S or C corporation (by filing Form 2553 for S corp election or Form 8832 for entity classification). If an LLC elects corporate taxation, file the corresponding corporate return instead.

In my practice I often see owners assume an LLC always means a separate return — but tax classification (the election you made or didn’t make) is the decisive factor.

How to decide: 5 practical steps

  1. Confirm legal form and tax elections: Check your state formation documents and any IRS election filings (Form 2553, Form 8832).
  2. Determine number of owners: Multi‑member LLCs generally file Form 1065; single‑member usually uses Schedule C unless it elected corporate tax status.
  3. Check payroll and employment tax needs: Corporations and S corps commonly use payroll for owner compensation; sole proprietors pay self‑employment tax via Schedule SE.
  4. Review deductions and tax planning: Some credits and deductions differ by entity type and may affect whether an election makes sense.
  5. When unsure, consult a CPA to avoid misfiling penalties.

Common mistakes to avoid

  • Treating a partnership or multi‑member LLC as a Schedule C business.
  • Forgetting that K‑1 income still affects your personal return and may be subject to self‑employment tax in partnership cases.
  • Not filing an election (e.g., 2553) in time; elections typically have strict deadlines.

Real‑world examples

  • A freelance web designer operating alone reports income and business expenses on Schedule C and pays self‑employment tax via Schedule SE.
  • A two‑owner consulting LLC that hasn’t elected corporate status files Form 1065 and each owner receives a Schedule K‑1 to report their share.

Where to learn more (internal resources)

Authoritative sources

Disclaimer

This article is for educational purposes and does not constitute tax advice. Rules and deadlines can change — consult a qualified tax professional or the IRS for guidance specific to your situation.