BUSINESS ORGANIZATIONS - STATE LAW ATTRIBUTE COMPARISON GRID Corporation Attribute Sole Proprietor General Partnership Limited Partnership Limited Liability Company C- Corporation S-Corporation One individual who carries An association of two or more individuals who make a A hybrid entity, generally formed under state law that A business entity that carries its A corporation can elect to be taxed as an S corporation. on an incorporated trade or legal contract to carry on a trade or business. A joint combines the pass-through attributes of a partnership with own legal status, separate and Call a Small Business Corporation Form 2553. Must business. undertaking merely to share expenses or share the limited liability of a corporation. The LLC can also distinct from its owners. Fiscal year. file within 15 days of the 3rd month of the corps tax •Reporting Entity ownership of property does not necessarily constitute a elect to be taxed as a C Corporation. (Check the box Form • Taxing Entity year Only domestic corporations with one class of stock •Not a Taxing Entity (Pass partnership. 8832). • Reporting Entity eligible. Limited to 75 shareholders, and may not have thru entity) •Reporting Entity •Reporting Entity another corporation as a shareholder. Calendar year Description •Not a Taxing Entity (Pass thru entity) •Not a Taxing Entity (Pass thru entity) • Not a Taxing Entity (Pass thru entity) • Reporting Entity Must apply for EIN Must apply for EIN . GP are not employees Must apply for EIN Must apply for EIN Must apply for EIN otherwise may use SSN. Employees Owners are not employees Net profit is computed on Partnership income and expenses flow through to the Taxed as a partnership, unless election is made on form A C corporation pays tax on its Taxed in the same manner as a partnership. Income and this is a Must register with the statesimple , if no written agreement is desired; complex, if written agreement is desired; Schedule C or C-EZand is individual partners. Income is taxed to the partner 8832. Income and expenses flow through to members. profits. When the owners expenses flow through to shareholders. Pass-through test to see reported as income on the whether or not it is actually distributed. Pass-through (shareholder) take profits form he items retain the same character in the hands of the owner's Form 1040. items retain the same character in the hands of the corporation, the distributions take shareholder as they had in the hands of the corporation. Taxation partner as they had in the hands of the partnership. the form of taxable dividends (double taxation). "Personal Service Corporations" are taxed at a high rate, 35% flat rate. easy Must register with the state and have a written agreement that complys with state law if LLC Must register with the state; less Must register with the state. Less complex if standard complex if standard forms and used; forms are used; more comples if owners need a buy-sell more complex if owners need a buy- and/or a close corporation agreement. sell and/or a close corporation Ease of agreement. written agreement is not required by statue; written agreement is preferred, formation especially for a limited partnership and limited liability company When when business when business starts when the organizing document is filed with the Secretary of State corporation agreement corporation agreement formed starts Organizing None None - may need to Certificate of Limited Articles of Organization Articles of Incorporation Articles of Incorporation or Charter document file fictitious name Partnership or Charter form Limited No No General Partner -- No Yes Yes Yes liability Limited Partner -- Yes of owners Extent of liable for own wrongful acts and contracts G.P. - same as any liable for own wrongful acts;not liable for wrongful acts of employees or other owners solely because of being an owner; not liable for liability of and torts and contracts of employees general partner contracts unless owner personally guarantees obligation or executes contract without disclosing principle/agent relationship owners and partners solely because of being L.P. - same as a an owner; general partners are jointly member and a and severally liable for torts and jointly shareholder liable for contract Attribute Sole Proprietor General Partnership Limited Partnership Limited Liability Company Corporation C-Corporation S-Corporation Continuity No No No No Yes of life Business dissolves upon the death, insanity, bankruptcy, dissolution, withdrawal perpetual --death, insanity, bankruptcy, dissolution of a shareholder does not dissolve of a general partner, member (but not a limited partner); remaining owners may the corporation. reformulate and continue or wind-up. For an LLC formed since November 21, 1997, a member may not resign unless the operating agreement permits. Number of one at least two at least two; at least two in some states; some at least one at least one owners at least one GP and permit one owner; trend is toward at lease one LP one owner; since November 21, 1997, Ohio permits one owner. Can creditors N/A Yes -- by No No No No of individual obtaining owners force and foreclosing dissolution of on a charging the entity order Double No No, if it does not elect to taxed as a corporation Yes - if the corporation has any No - except for built-in gains tax and passive taxation income left after paying salaries investment income tax. and other expenses. Tax law None None None; None None 75 or less (spouses are treated as one) restrictions 500 or more owners could result in corporate treatment no partnership, non-resident aliens, limited types on owners of trusts, no corporations Deter- N/A If two owners - as a partnership if not publicly traded and does not elect to be taxed Always taxed Not taxed mination as a corporation; if there is only one owner, it is taxed as a sole proprietorship as a C-corp. of tax if the owner is an individual, or as a division, if the owner is an entity, unless it status elects to be taxed as a corporation. Employee Owners are restricted in their participation in retirement and other benefits available to employees. In other words, No restrictions Like partnership, except benefits some benefits available to owner/employees of corporations are not available to sole proprietors, partners and members, on availability of limitations apply or available such as: (I) full deductibility of health care costs (limited in sub-k), (ii) 401(k) plans (not available to sole proprietors), benefits to owners >2% owners. Some to owners (iii) deductible life insurance premiums, and (iv) cafeteria and other qualified plan benefits. Owners may, however, limits apply to participate in a SEP, IRA, SIMPLE, >5% owners. Owner is subject to self- A general partner's share of business income (including Profits are subject to income tax in the same way as a Shareholders who perform services An employee/shareholder of an S corporation receives employment tax of 15.3% of guaranteed payments) is subject to self-employment tax. partnership. Member's business income (including for a corporation, including officers, wages for services rendered. Wages paid to net earnings. Self- A limited partner's share of business income is not guaranteed payments) is subject to self-employment tax. • are treated as employees. Wages of employee/shareholders must be "reasonable." employment tax is computed subject to self employment tax unless the partner Avoids double taxation of profits corporate employees are subject to Additional profits are passed through to the shareholder on Schedule SE and is performs services for the partnership. Other items, such payroll tax and withholding Wages and are taxable for income tax purposes but not for SE Wages & SE Tax reported as "Other taxes" on as interest and dividends, retain their character and are paid to employee-shareholders must tax purposes. Double taxation of profits is avoided. Form 1040. passed through to the partners individual income tax be "reasonable." Dividend return. distributions are not subject to SE tax. Corporation Attribute Sole Proprietor General Partnership Limited Partnership Limited Liability Company C-Corporation S-Corporation • Minimum legal restrictions. • A partnership can be a good way to combine the skills • Avoids certain S corporation restrictions. • Limited liability. • Profits passed through are not subject to SE tax as in a and/or financial abilities of several different people. • Ease of transer of ownershp partnership. • Perpetual life •Ease of transfer of ownership Advantages • Easy to discontinue. • Ease of transfer of ownership. • Limited liability. • Ability to raise capital through • Perpetual life. issuance of stock. • Ability to raise capital through issuance of stock. • Unlimited liability • A partnership is often easier to get into than out of. • Inconsistent treatment state to state. • Double taxation of profits. • Shareholders pay tax on profits even if undistributed. • May not bring in new • General partners are liable for actions of other partners. • Relatively new business entity with little regulatory or • Corporate charter restricts types of • Less flexibility in selecting tax year. Disadvantages owners or outside capital case law to follow. business entities. • Pension contributions limited to wages not on total contributions profit. • Income tax cannot be • Subject to various state and federal • Pension contributions limited to wages not on total deferred by retaining profits. controls. profit. IRS Publication/Form 334/Sch C, C-EZ, Form 1040 541/Form 1065, K-1 541/Form 1065, K-1 542/Form 1120 589/Form 1120S LIMITED LIABILITY PARTNERSHIP: A limited liability partnership ("LLP") is a general partnership that files a registration with the Secretary of State and by doing so permits the partners to avoid joint and several liability for wrongful acts of partners and employees.