How does nonprofit taxation differ from other business entities?

Nonprofit corporations that obtain tax-exempt status with the IRS are exempt from paying federal income tax and may also have a number of other tax exemptions available at the state and local levels. The following is a brief overview of how other common business entities are taxed.

• Sole proprietorships – Profits are taxed once as the sole proprietor’s personal income.
• Partnerships – Profits are taxed once on each partner’s share of the income (according to their partnership agreement). Another name for this is “pass-through taxation,” wherein profits are passed directly through to the owners who are directly taxed on their shares of the business's profits, thereby bypassing taxation at the entity level.
• C corporations – Profits receive “double taxation,” wherein profits are taxed once at the entity level and again at the personal level when distributed as salaries.
• S corporations – Profits receive pass-through taxation.
• LLCs – The default for LLCs is pass-through taxation, but LLCs may also elect to be taxed as either a C corporation or S corporation by filing the appropriate form with the IRS.