Entities

Question 1

Sole Proprietorships

Advantages and disadvantages

Answer 1

Easy to form 
Simple to operate
Easy to sell biz assets
Few administrative burdens
Income is generally passed through to the owner on schedule C of Form 1040

Generally have limited sources of capital
Unlimited liability
No guarantee of continuity beyond the proprietor
Business income is subject to self employment tax

Question 2

Partnerships

Advantages and disadvantages

Answer 2

More sources of initial capital than proprietorships
Usually have more management resources available than proprietorships
Have fewer administrative burdens than corporations
Income and losses are generally passed through to the partners for tax purposes

Transfer of interest is more difficult than for proprietorships
Unlimited liability each partner is liable for partnership debts and obligations
Partnership income tax and basis adjustment rules can be complex
Business income is subject to self-employment tax
Partners are entitled to few tax free fringe benefits that are generally available to employees

Question 3

Limited partnerships

Advantages and disadvantages

Answer 3

Favorable pass-through partnership taxation status
Flexibility in structuring ownership interest
Limited partners are not personally liable for the debts and obligations of the limited partnership as long as they do not engage in management

Must file with the state to register
In most states general partners are liable for debts and other obligations of those limited partnerships
Losses for a limited partnerships are generally passive losses

Question 4

Limited liability partnerships (LLP)

Advantages and disadvantages

Answer 4

Favorable pass-through partnership taxation status available
Flexibility in structuring ownership interest
Partners can insulate themselves from the acts of other partners

Required to file with the state to register
Unlimited liability for own acts of malpractice

Question 5

Limited liability companies (LLC)

Advantages and disadvantages

Answer 5

Members have limited liability
Number of members is unlimited but a single member LLC is a disregarded entity for tax purposes (file form 1040 schedule C)
Members may be individuals corporations trusts other LLCs and other entities
Income is passed through to the members usually on schedule K-1
Double taxation affecting most C corporations is voided if partnership tax status is elected
Members can participate in managing the LLC
Distributions to members do not have to be directly proportional to the members ownership interest as they do for S corporations
Can have multiple classes of ownership
Entity may elect to be taxed as a partnership an S corporation or a C corporation

May have limited life (often by termination on the death or bankruptcy of a member)
Transfer of interest is difficult and sometimes limited by operating agreement
Some industries or professions may not be permitted to use LLC status
Laws vary from state to state regarding LLCs
Laws are relatively new for LLCs therefore precedent from prior court cases are limited
For tax purposes the complex partnership rules generally apply
Members not meeting exceptions are subject to self-employment tax on all earned income if partnership status is elected

Question 6

C corporations

Advantages and disadvantages

Answer 6

Relative ease of raising capital
Limited liability of shareholders
Unlimited life of entity
Ease of transfer of ownership interest
Generally more management resources
Shareholder/employees may receive the full array of employer provided tax free fringe benefits

Potential for double taxation do to entity level taxation
Administrative burdens example filings
More difficult to form and dissolution can cause taxable gains
Borrowing may be difficult without stockholder personal guarantees, which negates part of the advantage of limited liability
Requires a registered agent
Requires a federal tax ID number

Question 7

S Corporations

Advantages and disadvantages

Answer 7

Income is passed through to the shareholders for federal income tax purposes
Income is taxed at the individual level which may be a lower tax rate than the applicable corporate rate
Shareholders have limited liability
Distribution from S corporations are exempt from the payroll tax system assuming the corporation provides adequate compensation to the shareholders who are employees of the corporation

Limited to 100 shareholders
Only one class of stock is permitted
Cannot have corporate, partnership, certain trust, or nonresident alien shareholders
Shareholder employees owning more than 2% of the company must pay taxes on a range of employee fringe benefits that would be tax-free to a shareholder/employee of a C corporation
The tax rate of the individual shareholder may be higher than the corporate tax rate
Borrowing may be difficult without stockholder personal guarantees, which negates part of the advantage of limited liability