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The Four Major Business Entity Types
The Four Major Business Entity Types The Four Major Business Entity Types The Four Major Business Entity Types
Information Center Newsletter Financial Tools About Our Services The Four Major Business Entity Types

The following is an outline of the tax and other aspects of the four major business and tax entities. This is not presumed to be the whole story but just a sketch of the major characteristics and a basis for further discussion.

Please note that a LLC - Limited Liability Company can be taxed as either a "S" Corporation or a partnership, or sole proprietorship depending on how the agreement is drafted.  The LLP - Limited Liability Partnership is taxed as a Partnership.  There are no separate tax forms for the LLC or LLP.

Sole
Proprietorship

Partnership

"S"
Corporation

"C"
Corporation

Net operating income

 Taxed directly to owner on 1040 Passed through to partners 1040 via form K-1 whether or not distributed Passed through to shareholders 1040 via form K-1 whether or not distributed Double tax-once on C Corp., again when paid to shareholder as dividends

Net operating loss

 Reduces AGI -Can be carried back 2 years and then forward 5 Passed through to partners 1040 via form K-1 Losses cannot exceed partners basis in Co. Passed through to shareholders 1040 via form

K-1 - Losses cannot exceed partners basis in Corporation

 Deductible only against income - Losses can be carried back 2 years and forward 15

Capital gains

 Taxed to owner Passed through to partners 1040 via formK-1 Passed through to shareholders 1040 via form

K-1

 Gains taxed at regular Corporation rate

Capital losses

 Offset against capital gains + $3K per year Passed through to partners 1040 via form K-1 Passed through to shareholders 1040 via form

K-1

 Deductible only against Corporation capital gains

Donations to charities

 Itemized deduction on 1040 Passed through to partners 1040 via form K-1 Passed through to shareholders 1040 via form

K-1

 Limited to 10% of Corporation income (adjusted)

Dividends received

 Taxed to owner on 1040 Passed through to partners 1040 via form K-1 Passed through to shareholders 1040 via form

K-1

 Can deduct from income 70% of dividends received

Tax rates

 Based on taxable income: 10% to 35% At partners individuals tax rate: 10% to 35% At shareholders individuals tax rate 15%-to 50K

25%-50K to 75K

34%-75K to 100K

Fringe benefits

 Partially deductible Not eligible to receive benefits Greater than 2% owners cannot receive benefits No restrictions

Retirement plans

 Various Various Profit sharing or defined contribution plan - no loans Profit sharing or defined contribution plan - loans allowed

Sale of ownership

 Capital gain May be part CG and part ordinary income Capital gain Capital gain

Liquidation

 N/A N/A Capital gain or loss to shareholder Double taxation-First at Corporation level, then for shareholder

Alternative minimum tax

 26% to 28% ATM Partnership not subject - preference items passed through S Corp. not subject - preference items passed through ATM of 20% at Corporation level

Payroll tax

 15.3% SE tax - 50% deductible on page 1 of 1040 Partnership income taxed as SE income on 1040 Undistributed income is not subject to payroll taxes Corporation and each employee pay 7.65% of FICA wages

Items affecting the partners' and shareholders' basis in business

 N/A

1. income and gains increase - losses decrease

2. capital increases - distributions decrease

3. partners share of liabilities increase basis

1. income and gains increase - losses decrease

2. capital increases - distributions decrease

3. loans put into the Co. increase basis - share of liabilities do not

 N/A

Cash vs. Accrual

 Can use either Can use either unless inventory is a factor Can use either unless inventory is a factor Cannot use cash if receipts are $5 million or more or if inventory is a factor

Splitting of income

 N/A Allocated according to partnership agreement Allocated according to shares owned N/A

Tax year

 Calendar year Must use same year as partners Calendar year, generally Calendar or fiscal year

Accumulated earnings tax

 N/A N/A N/A - unless S had previously been a C Corporation Unreasonable earnings above $250K ($150K for PSC) are hit with 39.6% special tax

Excessive compensation

 N/A N/A N/A If deemed excessive - becomes non-deductible dividend

Disallowed personal expenses

 Individual tax rate Partner pays individual tax rate Shareholder pays individual tax rate Double taxation - first at Co. level then at shareholder level

Personal Holding Co.

 N/A N/A N/A Subject to 39.6% tax rate

 

Other Considerations

Ease and cost of formation

 No special actions No special actions - just written partnership agreement Initial legal costs of $500 to $1,000 or $400 to $600 if you do it yourself Same as S Corporation

Period of existence

 Discretion of owner Termination if partners agree or on partners death or retirement Continues until dissolution - not affected by sale of shares Same as S Corporation with no restriction on eligibility of shareholders

Continuing costs

 Minimal Annual Federal and State partnership returns Annual Federal and State Corporation returns & annual state filing fee & minimum tax Annual Federal and State Corporation returns & annual state filing fee & minimum tax

Owners' exposure to business debts

 Liable for all debts of business General partners liable for all debts of business Shareholders liable only for capital contributions and debts that are personally guaranteed Shareholders liable only for capital contributions and debts that are personally guaranteed

Effect on entity upon withdrawal of taxpayer

 None Dissolution of partnership After stock is disposed of, Corporation continues After stock is disposed of, Corporation continues

Transfer of ownership

 N/A New partner requires consent of other partners Easy to do - just transfer stock to new owner Easy to do - just transfer stock to new owner

Limitation of ownership

 N/A No limit on number of partners Limited to 75 eligible shareholders No limit on number and eligibility of shareholders

Besides the decision regarding the type of business structure that might best suit your venture you may have other forms, etc. that you need to file:

  • Internal Revenue Service Form SS-4 in order to obtain a Federal Employer Identification Number (EIN).
  • Massachusetts Dept. of Revenue Form TA-1 to obtain a State EIN for withholding, sales and meals tax, or both (if a Massachusetts Corporation).

Our pledge to all our small business clients is to provide personal service at a reasonable price. We are ready to explain the issues - in plain English - and help you make educated decisions regarding your business. We offer a wide array of services to our small business clients. Whether you need help with payroll taxes, business & income taxes, or tax planning, we are on your team to provide Service and Solutions for all your business needs.

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