Taxes on Business Income in South Carolina
South Carolina imposes a corporate income tax of 5 percent upon corporate taxable net income attributable to South Carolina. If you operate your business as a sole proprietorship or via a pass-through entity, you must report your business income on your personal tax return.
In South Carolina, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.
C Corporations Are Subject to Corporate Income Tax
Domestic corporations (corporations organized in South Carolina) and foreign corporations (corporations organized in a state other than South Carolina) are subject to a South Carolina income tax. The corporate income tax is computed at 5 percent of taxable net income.
S Corporation Income Passes Through to Shareholders
If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business. South Carolina extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.
Partnership Income Passes Through to Partners
If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their South Carolina taxable adjusted gross income their distributive share of partnership income.
Limited Liability Companies Taxed Based on Federal Tax Status
South Carolina law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in South Carolina are classified as either partnerships or corporations for South Carolina tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership, it will not be taxed on its net income. Instead, members must include in their South Carolina taxable adjusted gross income their distributive share of LLC income.
If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for South Carolina tax purposes.