Which form of business entity is Good for you?
• Sole Proprietorship
• General Partnership
• Limited Partnership
• Limited Liability Partnership (LLP)
• C-Corporation
• S-Corporation
• Personal Service Corporation (PSC)
• Limited Liability Company (LLC)
Choosing the appropriate form of business organization that matches the lifestyle and the financial situation of the owner is very important. In fact, many businesses fail because of the wrong form of business organization. Common reasons are that the attributes of the form of business organization may determine or influence business formalities, taxation, profit sharing, assumption of business risk, and so forth.
Go through the chart below to acquaint yourself with some of the key attributes associated with the different forms of business organizations. Call us if you have additional questions.
Form of Entity Key Attributes
• No formalities involved during formation, except owner may file for local business license
• Owned by one person (could be owned by spouses and still a sole proprietorship)
• Owner files and pays income tax
• Owner liable for all business debts
• Little or no formalities involved during formation except partners may want to have a partnership agreement in writing
• Must have two or more owners
• Partnership files tax returns (information returns)
• General partners pay income tax
• General partners are liable for paying income tax
• Fewer formalities involved during formation
• Must file certificate of limited liability with the appropriate state
• Unlimited number of general partners
• LLP files annual tax returns (information returns) but pays no income tax
• General partners pay income tax after distribution of profit
• Many formalities involved during formation
• Unlimited number of shareholders (owners)
• Corporation files and pays income tax
• Shareholders pay income tax when corporation pays dividends
• Corporation is liable for all business debts except when a court pierce the corporate veil for misconduct by management
• -Formation same as C-Corporation
• -Must file Form 2553 with the IRS to qualify as an S-Corporation
• -Number of shareholders limited to 100
• -S-Corporation must file tax returns (information returns) but pays no income tax
• -Shareholders pay income tax
• S-Corporation is liable for business debts except a court pierces the corporate veil for misconduct by management
• Formalities the same as C-Corporation
• PSC is a taxing entity established by the IRS
• Must render service in areas such as accounting, engineering, law, architecture, consulting, etc.
• Employee/shareholders must own at least 10% of outstanding stocks on the last day of the first year of test period
• Employee/owner must perform at 20% of personal service
• PSC pays income tax at 35% flat tax rate
• -Unlimited number of members (owners)
• -LLC files tax returns but pays no income tax
• -Members pay income tax
• -LLC is liable for business debt except when a court pierces the limited liability veil for misconduct by members
Because federal and state tax laws and regulations are not always the same and they are always changing or revised. Readers are advised to verify all information provided herein for accuracy and clarity.
