An unincorporated business is any business entity that has not legally registered itself at the state level. It differs from incorporated businesses in one key aspect: incorporated businesses are separate legal entities from their owners, while unincorporated businesses are not.
That means incorporated business owners are afforded liability protection -- their personal assets cannot be seized by creditors to satisfy debt obligations incurred by the company because the company, not the owners, is the legal entity responsible for that debt. Unincorporated business owners, on the other hand, can be held personally liable to cover debt obligations incurred by the business.
Taxation is different as well. In this article we’ll look at the unincorporated business tax (UBT) that’s imposed by select jurisdictions such as New York City and Washington, D.C.
Unincorporated Business Tax: Who Has to Pay it?
The unincorporated business tax works differently in each jurisdiction.
New York City UBT
New York City’s UBT is imposed on unincorporated entities such as sole proprietorships, limited liability companies, and partnerships that engage in business or trade within the city. These entities are taxed at 4 percent of the income that’s generated from services performed in New York City whenever gross income exceeds $95,000.1
Unincorporated businesses don’t have to be domiciled in New York City to be subject to the unincorporated business tax; rather, they must have performed services or business activities within the city.2 Unincorporated business owners can figure their UBT through a single-sales factor calculation using sales generated within the city over the entity’s gross sales receipts. Unincorporated businesses, therefore, must keep accurate records of services performed within New York City limits to accurately determine their UBT.
There are some key exceptions to this tax, especially as it pertains to those who hold, lease, or manage real estate in New York City. However, according to the New York State Society of Certified Public Accountants, the city’s Department of Finance has been conducting increasing audits of unincorporated entities that claim exemption from the UBT.
In Washington, D.C., unincorporated businesses must pay UBT if gross receipts total more than $12,000. However, there’s a $30,000 salary allowance for business owners along with a $5,000 exemption that can be deducted from an unincorporated businesses taxable income to determine its UBT.
However, an unincorporated business operating in the nation’s capital is considered exempt if 80 percent of its gross income comes from personal services that are rendered by the entity’s members, or when income is generated from non material-income sources, such as fees, commissions, and other compensation related to personal services.
The Bottom Line
If you generate income that might be subject to an unincorporated business tax, you should consider consulting with certified tax professionals who have experience in these matters for a deeper explanation of any potential UBT liabilities you might face.
1. New York City Taxes: A Quick Primer for Businesses, New York Society for CPAs, http://www.nysscpa.org/most-popular-content/new-york-city-taxes-a-quick-primer-for-businesses#sthash.K5Sorhlq.dpbs
2. New York City’s Unincorporated Business Tax, Sher & Associates, https://www.sher-cpa.com/new-york-citys-unincorporated-business-tax-who-must-file-who-must-pay.php