Business structures

Description Income taxation
 Liability
 Advantages Disadvantages
Sole proprietorship Business that is owned and operated by one person. Income is taxed at the individual’s personal income tax rate and is reported on Schedule C or Schedule C-EZ.
 The owner is not protected from liability. Easy, inexpensive to create; owner keeps all income; flexible.
 Owners have unlimited liability and are responsible for company debts; may be hard to obtain financing; some employee benefits not fully deductible.
Partnerships Business is owned by two or more people who share profit and liability. Income is taxed on the partners’ individual tax forms.
 Partners are not protected from liability unless a limited partnership is created, where specific partners are not liable.
 Easy, inexpensive to create; profits go to partners’ income tax returns; could be easier to raise funds; good employees may be attracted to firm with partnership as an incentive. Profits must be shared; partners can be held liable for others’ mistakes; some employee benefits are not deductible.
C Corporation Business is set up as an entity that has its own rights, privileges and liabilities. Corporations are often run without direct owner involvement. Corporations are taxed at a different tax rate. Shareholders are taxed on their individual tax returns for any dividends they receive.
 Owners are generally protected from liability. Can raise money by selling stock; shareholders’ liability is limited to their investment (other than officers); employee benefit costs are deductible; easier to raise capital.
Expensive and time-consuming to form; income is taxed twice; more regulations.
S Corporation An S Corporation provides the liability protection of a corporation but the taxation benefits of a partnership. The tax status is only available for companies with fewer than 100 shareholders. Income from the company goes to each shareholder’s individual tax return, based on his or her share in the company. Owners are generally protected from liability. Protection of limited liability without paying corporate taxes; minimize self-employment and FICA taxes; easier to raise capital as a corporation.
 S Corporations are applicable to many regulations and restrictions, including number of shareholders; expensive to set up; scrutiny of IRS of employee shareholders, who must receive “normal” wages before receiving nonwage distributions.
Limited liability company (LLC or LLP) Business is set up as a separate entity. Its structure is more flexible than a corporation. Income is treated as a separate entity and has its own tax forms.
 Owners are generally protected from liability.
Limited liability with taxation benefits of a partnerships; no loss of power to a board of directors.
 Formation is more complex and expensive than a proprietorship or partnership (although less so than a corporation); LLCs are treated differently among states.