| SOLE PROPRIETORSHIP, SINGLE-MEMBER LLC | PARTNERSHIP, MULTI-MEMBER LLC | S- CORPORATION | C-CORPORATION | |
|---|---|---|---|---|
| ACCOUNTING AND RECORDKEEPING | • Accounting is less complicated than partnerships or corporations. A double-entry bookkeeping system is not required since no balance sheet is needed when filing Schedule C or F. • Must file as a calendar year business unless owner files Form 1040 under the fiscal year rules. | • Small partnerships are not required to provide a balance sheet with the return which requires double-entry booking. • A partnership must use the same tax year as its partners, but can use a fiscal year if there is a business purpose or an IRC section 444 election is made. • Complex books and records are needed when a partner exchanges interest or for special allocations and basis elections. | • Double-entry bookkeeping may be required depending on income and other factors affecting the need for a balance sheet on your return. • Must use a calendar year unless it establishes a business purpose for using a final year, or it makes an IRC section 444 election. | • Double-entry bookkeeping is required as the tax return requires a balance sheet. • No restriction on use of a fiscal year, unless it is a personal service corporation which must use the calendar year unless it establishes a business purpose or makes an IRC section 444 election. • Required to use the accrual method of accounting if average annual gross receipts exceed $26 million. |
| FRINGE BENEFITS | • Deductable fringe benefits are generally not allowed for the owner. • The exceptions: Health insurance id deductible IF the spouse is an employee of the business, and the owner is covered as a family member of he employee-spouse. The spouse is also eligible for dependent care assistance find benefits, de minimums fringe benefits, and working condition fringe benefits. | • Partners are eligible for some excludable fringe benefits. Taxable benefits are reported as guaranteed payments or an adjustment to a partner's distributable share of profits. | •Shareholder/employees are eligible for some excludable fringe benefits. Benefits added to taxable wages on W-2 of more than 2% shareholders include accident and health plans, up to $50,000 of group health insurance and meals and lodging furnished for the employer's convenience. | • Shareholder/employees eligible for excludable fringe benefits, generally to the same extent as any other employee, with exceptions under the non-discrimination rules. Benefits can include health insurance and reimbursement, education, life insurance, etc. |
| LIABILITY | • The owner is personally liable for all debts and lawsuits against the business. • The exception: If an LLC, liability is usually limited to the owner's investment and his or her own malpractice or debt guarantees. | • A general partner is personally liable for all debts and lawsuits borough against the partnership. • The exception: If the partner is a limited partner, or the business is organized as an LLC, liability is generally limited to the partner's investment, plus his or her own malpractice or debt guarantees. | • A shareholder's liability is limited to the amount invested, plus his or her own malpractice or debt guarantees. | • A shareholder's liability is limited to the amount invested, plus his or her own malpractice or debt guarantees. |
| ORGANIZATION AND OWNERSHIP | • One individual carrying on an unincorporated trade or business. • A qualified joint venture whose only members are spouses. • Easiest business to organize with minimal legal restrictions. • The entity does to. exist apart from the owner. Business starts and ends based on engaging in and ending engagement in business. • The owner has complete freedom over business decisions and is entitled to 100% of the profits. The owner is limited by his or her own ability to raise capital and obtain financing. Outside investors can't be part owners. • Transfer of ownership consists of consists of selling the business assets. • A single-member LLC is taxed as a sole proprietorship unless the election is made to be taxed as a corporation. | • Two or more owners conducting an unincorporated trade or business. • Easy to organize with minimal legal restrictions. • Multi-member LLCs are taxed as partnerships, unless the election to be taxed as a corporation is made. • No limitation on the number of partners or partner entities. • More flexibility than a corporation in dividing up profits, losses, ownership of capital, and making special allocations to partners. • Contributing property in exchange for a partnership interest is a tax-free event (except fo the receipt of cash) and there is generally no tax when liquidating a partnership interest in exchange for property (unless the liquidation is in cash only). • Getting out of a partnership may be more complicated than starting one. A partnership agreement can restrict selling or transferring of a partnership interest. • A partnership can terminate if too much ownership is exchanged or liquid in one year. • State law may limit an LLC's life. | • A corporation that has elected to be taxed as an S-corporation by filing Form 2553, Election by a Small Business Corporation. • Ownership is through owning shares of stock. Limited to 100 shareholders. • Stock is limited to one class of stock with equal rights to distributions and liquidation proceeds. • Shareholders are limited to individuals, estates, certain trusts and certain charities. Corporations and certain partnerships are ineligible to own stock. • Other ownership an organization issues are the same as a C-corporation. | • A legal association carrying on a trade or business organized under state law. • Ownership is through owning shares of stock, and there is no limit on the number shareholders, or type of taxpayer or entity. • Forming a corporation may require may require complex and expensive legal procedures. Corporations must hold board meetings, and keep corporate minutes. Corporations are subject to federal and state regulations. • The life of a corporation is perpetual. Transfers of ownership can be as easy as selling or inheriting stock. • Liquidating a corporation is usually a taxable event, and contributions in exchange for stock may be taxable. • Raising additional capital can be as easy as issuing new shares of stock. |
| TAXATION OF PROFITS AND LOSSES | • The owner is self-employed and pays self-employment (SE) tax on net profits. • Net profits are subject to income tax in the year earned and cannot be deferred by retaining profits. • Losses offset other income in the year incurred, such as W-2 wages, interest, and capital gains. • The exception: Losses cannot be used to offset income from activities subject to passive loss, at-risk loss, and hobby loss rules. • Owner may qualify for the 20% qualified business income (QBI) deduction | • The partnership pays no income tax. Profits pass through to partners for individual payment of taxes. • Tax to partners cannot be deferred by retaining business earnings. • Pass-through items retain the same character to the partner as they had to the partnership. • A general partner's distributive share of profits is subject of profits is subject to self-employment tax. Limited partners share of profits not subject to SE tax unless in the form of guaranteed payments. • Payment for partner services to the partnership is not W-2 income, but may be guaranteed payments, profits, or special allocations. • Losses flow through to partners and can be used to offset other income such as W-2 wages, interest and capital gains. • The exception: Losses can't be used to offset income subject to passive loss, at-risk loss, and hobby loss rules. • Partner may qualify for the 20% qualified business income (QBI) deduction. | • An S-corporation generally pays no tax. Profits flow through to the shareholders. • Pass-through items the same character to the shareholder as they had t the corporation. • Distributions are not subject to self-employment tax. • Shareholders who perform services are paid as employees and income is reported on a W-2. • Losses flow through to shareholders and may be used to offset other income, subject to passive, at-risk, and hobby loss exception rules. • Shareholder may qualify for the 20% qualified business income (QBI) deduction. | • Shareholders who perform services are paid as W-2 employees subject to payroll taxes and reporting rules. • Reasonable wages must be paid and not inflated to reduce corporate tax liability. • Net profits are subject to tax at the corporate rates. Profits distributed as dividends are taxed again on the shareholder's tax return. Tax to the shareholders can be deferred by retaining earnings for business purposes. • Losses do not pass through to shareholders. Business losses must be carried over to a year with profits. Capital losses must be carried over to a year with capital gains. AT-risk limitations, hobby losses, and passive loss rules do not apply. |