Choosing a Business Entity
TYPE OF BUSINESS LEGAL STRUCTURE |
OWNERSHIP |
CONTROL |
LIABILITY |
TAXES |
Can Owners Deduct losses from their personal tax payments | Can you decide income or expenses to allocate among owners regardless of the capital each invests? | ADVANTAGES | DISADVANTAGES |
FEE(INCLUDES Registering FEE) |
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Sole Proprietorship |
Individual |
Controlled by Owner |
Owner is personally liable for all business debts |
All business income is considered personal income to the owner and is taxed at personal income tax rates |
yes | N/A | Easy set up and understand - best way to start if you don't have a lot of personal wealth | Personal liability, self-employment tax | |
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General Partnership |
Two or more individuals or other entities (sometimes with partnership agreement) |
Partners control with partnership agreement |
All partners are liable for all partnership debts |
Partners’ share income or loss included on the income tax return of the partner and taxed at personal or corporate rates |
yes | yes | can allocate income and expenses as agreed among partners | Liable for actions of other partners. Self-employment tax. | |
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Limited Partnership
|
Two or more owners / general partners and limited partners |
General partner(s) may end partnership at their discretion, limited partners do no have this option. |
Limited partners are only liable to extent of capital invested |
Same as general partnership |
yes | yes | Liable for actions of other partners. Self-employment tax. |
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“C” Corporation |
Shareholders (Unlimited number) |
Oownership through stock, and business is managed through a Board of Directors; Other legal regulations also apply |
Shareholder liability is limited to amount of capital contributed unless also acting as guarantor of debt |
Corporation pay tax on business income at corporate tax rate; profits distributed to shareholders and are taxed at personal income tax rate |
no | no | 100% deductible health insurance, fully deductible medical reimbursement and fringe benefits plans, up to $50,000 profits are taxed at 15% if left in the corporation rather than at your higher, personal income tax rate. | cannot use corp. expenses to offset your personal income. if corp. has a lot of profits, doublet taxation occurs | |
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“S” Corporation
|
Shareholders |
Same as “C” Corporation |
Same as “C” Corporation |
Corporation not taxed; income is taxable to the shareholders at their personal income tax rate |
yes | no | No Social Security or Medicare taxes | no health insurance deduction and limited deductions for home office | |
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Limited Liability Company |
One or more members |
Controlled by members or managers, as set out in operating agreement |
Generally, same as “C” Corporation above |
Taxed as partnership, corporation or may be disregarded depending on election made. |
yes | yes | |||
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Limited Liability Partnership |
Two or more owners; limited partners |
Controlled by partners in accordance with partnership agreement |
Limited and General partners only liable of capital invested |
Same as general partnership |
yes | yes | Limited Liability as in a corporation with pass through income benefits of a partnership. | Self employment tax, unsettled, and insufficient law issues as to the legal and tax treatment of this entity. |
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