Forms of Ownership

Type of Entity

Tax

Main Advantages

Main Drawbacks

Sole Proprietorship

Flow-through

v      Simple and inexpensive to create and operate

v      Owner personally liable for business debts

General Partnership

Flow-through

Owners (partners) report their share of profit or loss on their personal tax returns

v      Simple and inexpensive to create and operate

v      Owners (partners) personally liable for business debts

Limited Partnership

Flow-through

v      Limited partners have limited personal liability for business debts as long as they don't participate in management

v      General partners can raise cash without involving outside investors in management of business

v      General partners personally liable for business debts

v      More expensive to create than general partnership

v      Suitable mainly for companies that invest in real estate

Regular Corporation

Separate taxable entity

v      Owners have limited personal liability for business debts

v      Fringe benefits can be deducted as business expense

v      More expensive to create than partnership or sole proprietorship

v      Paperwork can seem burdensome to some owners

S Corporation

Flow-through

v      Owners have limited personal liability for business debts

v      Owners report their share of corporate profit or loss on their personal tax returns

v      Owners can use corporate loss to offset income from other sources

v      More expensive to create than partnership or sole proprietorship

v      More paperwork than for a limited liability company which offers similar advantages

v      Income must be allocated to owners according to their ownership interests

v      Fringe benefits limited for owners who own more than 2% of shares

Limited Liability Company

IRS rules now allow LLCs to choose between being taxed as partnership or corporation

v      Owners have limited personal liability for business debts even if they participate in management

v      Profit and loss can be allocated differently than ownership interests

v      More expensive to create than partnership or sole proprietorship

v      State laws for creating LLCs may not reflect latest federal tax changes

Nonprofit Corporation

Not taxed on operations

v      Corporation doesn't pay income taxes

v      Contributions to charitable corporation are tax-deductible

v      Fringe benefits can be deducted as business expense

v      Full tax advantages available only to groups organized for charitable, scientific, educational, literary or religious purposes

v      Property transferred to corporation stays there; if corporation ends, property must go to another nonprofit

 

 

From www.nolo.com