Form 1099s are information returns. The IRS requires you to send information returns whenever you have a significant transaction with a company or individual that may have tax consequences for you or that third party. There are several different kinds of Form 1099s. You must send them whether you engaged in the transaction with a limited liability company, limited liability partnership, partnership or sole proprietor.
Types of Form 1099s
If you hire an independent contractor or company to perform a service for you in connection with your business and you paid them more than $600, or if you pay over $10 in royalty payments, you must send them a Form 1099 MISC, with a copy to the Internal Revenue Service. If you forgave a portion of a loan, that may have taxable consequences, too, and you must send the debtor a Form 1099-C. Form 1099-DIV covers dividends and distributions of capital gains, and 1099-S covers payments from real estate transactions.
Limited Liability Entities
Limited liability entities include limited liability companies (LLCs) and limited liability partnerships (LLPs). These are a special type of business entity that are formed under state law, but they have no legal status under federal law. Instead, members of LLCs and LLPs can choose whether to let the businesses exist as partnerships under federal law, or be treated as corporations for tax purposes.
If you did business with a corporation, you typically do not need to send them a Form 1099 MISC, even if you did do over $600 in business with them. There are a few narrow exceptions to the rule, including medical and health care payments made to a corporation, attorney's fees and fish purchased for cash.
LLPs vs. Corporations
Business managers are often confused by the special status of limited liability partnerships. Unless you do a good deal of due diligence, you may well not know if the LLP you have been doing business with is doing business with the IRS as a partnership or if they are actually filing taxes as a corporation. If there is any doubt, generate the Form 1099. Failure to generate and forward a Form 1099 can carry penalties of $50 per instance and up, whereas generating a 1099 for a corporation carries no penalty.