Form 1065 vs 1120: Which IRS Tax Form Does Your Business Need?

If you operate a business in the U.S., your federal tax filing obligations depend on your business structure. The IRS doesn’t use a one-size-fits-all form. Instead, different entity types file different returns, and getting this right is key to staying compliant.

• Form 1065 is filed by partnerships and multi-member LLCs taxed as partnerships.
• Form 1120 is filed by C corporations, which are taxed separately from their owners.
• Form 1120S is filed by S corporations, which pass income through to shareholders for personal reporting.

Each of these forms aligns with a specific business structure and tax treatment. If you’re unsure which one applies to you, understanding the basics is the first step toward filing correctly.

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How Is Form 1120S Different from Form 1065?

At first glance, Form 1065 and Form 1120S seem similar as both are used by pass-through entities, and both require issuing Schedule K-1s to owners. But beneath the surface, these forms represent two very different structures with distinct rules.

Entity Type and Eligibility

• Form 1065 is used by partnerships and LLCs taxed as partnerships. There are no limits on the number or type of partners, and ownership can include individuals, other entities, or foreign partners.
• Form 1120S is used by S corporations that have made an S election using Form 2553. To qualify, they must meet strict requirements of having no more than 100 shareholders, all of whom must be U.S. individuals or certain trusts and estates.
  

Ownership and Management

• Partnerships offer flexibility. Owners can split profits and losses however they agree, regardless of ownership percentage.
• S corporations must allocate income based strictly on stock ownership. A 20% shareholder receives exactly 20% of income.
  

Tax Treatment

• Both forms enable pass-through taxation, but S corps can provide self-employment tax savings by classifying part of the owner’s income as a salary (subject to payroll tax) and part as a distribution (not subject to self-employment tax). This option isn’t available in partnerships.
  

Let’s understand this with an example. A digital agency run by three founders with different capital contributions and roles may prefer to file as a partnership using Form 1065 for flexibility in profit-sharing. The same agency might elect S corp status and file Form 1120S to save on self-employment tax provided they meet eligibility rules and prefer a more formal ownership structure.

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Which Entities Are Required to File Forms 1065, 1120, or 1120S?

Each IRS form aligns with a specific type of business entity and tax classification. Here’s how you can choose the correct form based on how your business is legally structured:-

1. Form 1065: Partnership Tax Return

Form 1065 is used by businesses that are treated as partnerships for federal tax purposes. This includes:

• General partnerships
• Limited partnerships (LPs)
• Multi-member LLCs taxed as partnerships

These entities don’t pay income tax at the business level. Instead, the partnership files Form 1065 to report total income and deductions. Each partner then receives a Schedule K-1 showing their share of income, losses, and credits to report on their personal tax return.

Example: An LLC with two founders operating a consulting business, without making any special tax elections, would file Form 1065 by default.

2. Form 1120: C Corporation Tax Return

Form 1120 is filed by C corporations that are taxed separately from their owners. C corps pay corporate income tax on their profits. If profits are distributed to shareholders as dividends, those dividends are taxed again at the individual level.

This form also applies to LLCs that elect to be taxed as C corporations by filing IRS Form 8832. These entities are treated like corporations for tax purposes, even if they’re LLCs in legal structure.

Example: A venture-funded startup incorporated in Delaware as a C corp would file Form 1120 every year, even if it is not yet profitable.

3. Form 1120S: S Corporation Tax Return

Form 1120S is used by entities that have elected to be taxed as S corporations using Form 2553. S corps are pass-through entities, meaning the corporation doesn’t pay income tax directly. Instead, income is passed through to shareholders via Schedule K-1.

To qualify, the business must meet strict eligibility rules:

• Only U.S. individuals, certain trusts, and estates can be shareholders
• No more than 100 shareholders
• Only one class of stock

LLCs can also file Form 1120S if they meet these requirements and elect S corp status.

Example: A solo founder running a service business through an LLC may elect S corporation status for tax savings. After the election, they must file Form 1120S each year.

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How Is Business Income Taxed Under Forms 1065, 1120, and 1120S?

The biggest difference between these forms lies in how income is taxed—whether the business pays the tax directly or the owners do through their personal returns.

1. Form 1065 and Form 1120S: Pass-Through Taxation

Businesses that file Form 1065 or 1120S do not pay federal income tax at the entity level. Instead, profits (or losses) are passed through to the individual owners, who report it on their personal tax returns.

• Partnerships (Form 1065): Income is allocated based on the partnership agreement. Partners pay tax on their share—regardless of whether they received actual distributions.
  
  
• S Corporations (Form 1120S): Income is divided based on stock ownership. Shareholders pay tax on their portion and may receive distributions, which are typically not subject to self-employment tax.

This structure avoids double taxation and can offer flexibility—but it also means owners are taxed on earnings even if the business retains the cash.

2. Form 1120: Corporate-Level Taxation

C corporations that file Form 1120 are taxed as separate entities. The corporation pays federal income tax on its profits. If those profits are later distributed to shareholders as dividends, they’re taxed again—this time on the individual’s return.

This system is known as double taxation:

1. Once when the corporation earns profit
2. Again when that profit is distributed to shareholders

Example Comparison

• A two-member LLC filing Form 1065 reports $200,000 in profit. Each partner gets a K-1 showing $100,000 and includes it on their personal return.
• An S corp earning $200,000 splits that between two equal shareholders. They each report $100,000 via Schedule K-1, and if they take $50,000 as salary, only that part is subject to payroll tax.
• A C corp with $200,000 profit pays corporate tax on that amount. If it distributes $100,000 in dividends, shareholders pay tax on their portion separately.

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Ownership and Management Rules for Partnerships vs. S Corporations

Choosing between a partnership and an S corporation isn’t just about taxes—it’s also about how the business is run and who can own it. These two structures come with very different rules for ownership, decision-making, and profit-sharing.

Here’s a side-by-side comparison:

While partnerships offer flexibility in ownership and decision-making, S corporations come with stricter compliance and formalities. But that structure can be worth it for certain advantages.

Example: A consulting firm with five partners who want to split profits based on effort, not capital, would likely prefer a partnership. But a bootstrapped SaaS startup with equal ownership and plans to optimize for self-employment tax might benefit more from S corp status.

Note: Partnerships let you shape the business around relationships and contribution; S corporations require you to follow IRS rules around structure in exchange for potential tax efficiency.

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What Is Schedule K-1 and How It Connects to Forms 1065 and 1120S?

Schedule K-1 is a crucial document for businesses that file either Form 1065 or Form 1120S. It’s how the IRS tracks who earns what in a pass-through entity—and how individual owners report that income on their personal returns.

Here’s what Schedule K-1 does:-

• It breaks down each owner’s share of the business’s income, deductions, credits, and other tax items.
• Each partner (in a partnership) or shareholder (in an S corporation) receives their own K-1.
• The recipient then uses this document to report their portion of the business’s tax items on their personal tax return (usually on Schedule E of Form 1040).

Schedule K-1 is used in these scenarios:-

• Form 1065 (for partnerships): Generates a K-1 for each partner
• Form 1120S (for S corporations): Generates a K-1 for each shareholder
• Form 1120 (for C corporations): Does not use Schedule K-1, since C corps pay tax at the entity level and don’t pass income directly to shareholders.

Let’s understand it with an example of a three-partner design agency that files Form 1065. The firm earns $300,000. In this scenario, each partner will receive a Schedule K-1 showing their $100,000 share (regardless of whether cash was distributed). 

On the other hand, there is a small S corp that files Form 1120S and has two shareholders who each own 50% of the company. In this case, they each will receive a K-1 showing half the company’s net income, even if the business keeps all its earnings.

In short: If your business uses pass-through taxation, your personal tax return isn’t complete without a Schedule K-1.

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How Do LLCs Decide Between Filing Form 1065, 1120, or 1120S?

LLCs are unique because they don’t have a fixed tax form. The IRS allows them to choose how they want to be taxed (by default or through election) making the decision around Form 1065, 1120, or 1120S a strategic one.

Here are default classification rules:-

• Single-member LLCs are treated as disregarded entities by default. They report business income on Schedule C of the owner’s personal Form 1040.
• Multi-member LLCs are treated as partnerships by default and must file Form 1065.

This happens automatically. No special election is needed if you stick with the default.

LLCs that want to be taxed differently can file IRS forms to elect corporate treatment:

These elections give LLCs access to potential tax planning strategies (like S corp salary/distribution splits) but also increase compliance requirements.

Here are a few examples:-

• A solo freelance writer operating through an LLC with no special election would report income using Schedule C, not any of the business forms.
• A two-founder marketing agency operating through an LLC would file Form 1065 by default unless they elect S corp status and then file Form 1120S.
• A fast-growing eCommerce brand set up as an LLC but wanting to reinvest profits and retain earnings might elect C corp status to file Form 1120 and take advantage of the 21% flat corporate tax rate.

Bottom line: LLCs have flexibility but each path has tax and compliance consequences. Once you elect corporate status, you can’t switch back easily.

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Frequently Asked Questions

1. Can a multi-member LLC file Form 1120 instead of Form 1065?

Yes, but only if it elects to be taxed as a corporation using IRS Form 8832. Without this election, the default classification for a multi-member LLC is a partnership, which requires filing Form 1065.

2. What are the eligibility requirements to file Form 1120S as an S corporation?

To file Form 1120S, the business must:

• Be a domestic corporation or LLC
• Have no more than 100 shareholders
• Issue only one class of stock
• Have only eligible shareholders (U.S. individuals, certain trusts, estates)
• File Form 2553 to elect S corp status by the IRS deadline

3. Do C corporations file Schedule K-1 with Form 1120?

No. Schedule K-1 is used only with Form 1065 (for partnerships) and Form 1120S (for S corporations). C corporations file Form 1120 and pay tax at the entity level; they do not pass income through to shareholders via K-1s.

4. How do S corporations reduce self-employment taxes compared to partnerships?

S corp owners split their income into a salary (subject to payroll taxes) and distributions (not subject to self-employment tax). In partnerships, all earnings are typically subject to self-employment tax unless the partner is a limited partner with no active role.

5. If I’m the only owner of my LLC, which form should I file—1065, 1120, or 1120S?

By default, a single-member LLC is treated as a disregarded entity and reports income on Schedule C of the owner’s personal tax return. If the LLC elects C corp or S corp status, it would then file Form 1120 or Form 1120S, respectively.