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Chart of Entity Comparison

Sole Proprietor Partnership C Corporation S Corporation LLC
Legal Status Same entity as owner Separate entity from Separate entity from Separate entity from Separate entity from
owner owner owner owner

Separate Taxable No No Yes No Depends on tax status as
Entity from Owner sole proprietorship,
partnership, or corporation

Ease of Formation Very easy Partnership agreement is Articles of incorporation Articles of incorporation Articles of organization
helpful generally required generally required generally required

Management Owner May be divided among Board of Directors Board of Directors Per articles of organization
partners

Continuity of Life Terminates with death of Cessation of business; Continuous Continuous Per articles of organization
owner ceasing to operate as a
partnership; sale or
exchange of 50% or more
of the profits and capital
within a 12-month period;
may terminate with death
of partner if agreement
specifies.

Number of Owners One Unlimited Unlimited 100 Depends on tax status as
sole proprietorship,
partnership, or corporation

Eligible Owners Individuals Unlimited Unlimited Some limitations Depends on tax status as
sole proprietorship,
partnership, or corporation

Owner Liability Unlimited exposure Unlimited if general Limited to investment, Limited to investment, Limited to investment,
partner; limited to except for personal except for personal except for personal
investment if limited services services services
partner

Transferability of Only by sale of entire Can sell all or a portion of Can sell all or a portion Can sell all or a portion of Per articles of
Ownership business or creation of a partnership interest of stock stock organization; commonly
different entity has some limitations

Ability to Raise Limited to owners assets Limited to owners assets Limited to owners’ Limited to owners’ Limited to owners’
Capital and borrowing ability and borrowing abilities; contributions and contributions and contributions and LLC’s
can sell interests to raise corporation borrowing corporation borrowing borrowing abilities; can sell
capital abilities; can sell abilities; can sell interests interests to raise capital
interests to raise capital to raise capital

© 2010 National Association of Tax Professionals
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at shareholders limitations apply. Decreased by Decreased by losses. Increased by additional Increased by profits and Depends on tax status as Operations cash invested additional contributions. or corporation deferral of income rule. substantial economic partnership. and increase in partner’s partnership. or corporation reality Tax on Formation if No gain or loss Gain to the extent debt No gain if debt relief No gain if debt relief does Depends on tax status as in Control relief exceed basis of does not exceed basis of not exceed basis of sole proprietorship. basis. at partnership. or corporation risk. distributions. at. or election. or corporation share of debts Basis Decreases Normal basis Decreased by losses. Passed through to Depends on tax status as Losses risk. nontaxable return of deductions. deductions. passive Nonliquidating 100% belongs to owner Based on partnership Pro-rata among shares Rights must be pro-rata Pro-rata among shares if a Distributions agreement among shares corporation. or business sole proprietorship. or based on partnership agreement if a partnership © 2010 National Association of Tax Professionals 2 . the least aggregate purpose demonstrated partnership. and sole proprietorship. normal sole proprietorship. basis. Calendar or fiscal year Calendar year. or corporation amortization. if any distributions partnership. Sole Proprietor Partnership C Corporation S Corporation LLC Ownership Rights Total Divided among partners Divided among Divided among Divided among members shareholders shareholders Tax Year Same as owner Majority interest rules. investments additional contributions sole proprietorship. limitations apply. partner’s share of debts Deductibility of Normal limitations. depreciation. Control relief partnership. Passed through to Stay at corporate level. property transferred the FMV of the stock the FMV of the stock partnership. §444 Depends on tax status as principal partner rules. Depends on tax status as from Operations adjustments. passive partners. or corporation Basis Increases from Additional purchases or Increased by profits. property transferred property transferred and property transferred and partnership. normal not passed through to shareholders. or corporation no other assets received no other assets received by transferee by transferee Tax on Formation if Not applicable since Gain to the extent debt Gain or loss as if sold Gain or loss as if sold Depends on tax status as Not in Control always in control relief exceeds basis of property transferred for property transferred for sole proprietorship. passive risk. or corporation received received Original Basis of Not applicable since Basis of property FMV of stock received FMV of stock received Depends on tax status as Stock if Not in always in control transferred less debt sole proprietorship. etc. and decreases in capital. 100% if a sole proprietorship. exceptions may be the business purpose of §444 election Allocation of Income 100% to owner Based on partnership 100% to corporation Normally pro-rata based Depends on tax status as agreement if it has on per share/per day rule sole proprietorship.

Any applicable method. may qualify for sole proprietorship. or corporation Alternative Minimum Applies at individual Applies at partner level Applies at corporate Applies at shareholder Depends on tax status as Tax level level level sole proprietorship. or corporation shelter or has a use inventories. partner wages wages partnership. or corporation Death . date of death partnership. investments. Owner Level part of owner’s return marketable securities received partnership. or corporation exceed basis or if partner receives a disproportionate share of unrealized receivables Worthlessness of Already has written off Capital loss of remainder Capital loss of remainder Capital loss of remainder Depends on tax status as Investment or capitalized all of basis of basis. partnership. Depends on tax status as reflects income cannot use cash method cannot use cash if it’s a cannot use cash if it’s a tax sole proprietorship. or corporation age of 18. No. owner who are under the owner who are under the partnership. of partnership is a tax tax shelter. therefore all reported as forgiveness. Depends on tax status as Entity Level may be able to deduct partner may be able to shareholder may be able to sole proprietorship. or corporation §754 election available at partnership level Self-employment Yes Yes if general partner. Most are nondeductible. or has inventories. debt Sold stock for value of Sold stock for value of Depends on tax status as Distributions . or corporation Salaries Paid to Exempt from FICA for Exempt from FICA for No exemption for any No exemption for any Depends on tax status as Family Members wages paid to children of wages paid to children of family member family member sole proprietorship. spouse and age of 18 only if all parents exempt from partners are parents of FUTA children Accounting Method Any method that clearly Any applicable method. since payment for Depends on tax status as Tax generally no if limited services is in the form of services is in the form of sole proprietorship. or has annual corporation as a partner annual gross receipts gross receipts over certain over certain limits limits Fringe Benefits . Most are nondeductible. may qualify for of basis. required o use partnership. date of death on the date of death. or corporation health insurance health insurance health insurance premiums premiums premiums © 2010 National Association of Tax Professionals 3 . loss sale of §1244 ordinary loss §1244 ordinary loss partnership. partnership.Basis Basis of assets is Basis of partnership Basis of stock is Basis of stock is generally Depends on tax status as Adjustments generally FMV on the interest is generally FMV generally FMV on the FMV on the date of death sole proprietorship. since payment for No. Any applicable method. 100% of qualifying deduct 100% of qualifying deduct 100% of qualifying partnership. required o shelter. Most are deductible Most are nondeductible. Gain if cash. and cash and property cash and property received sole proprietorship. Sole Proprietor Partnership C Corporation S Corporation LLC Liquidating Not a separate entity. or corporation assets if sold treatment treatment Charitable Generally 50% limitation Generally 50% limitation Generally 10% limitation Generally 50% limitation Depends on tax status as Contributions at partner level at shareholder level sole proprietorship.

When choosing a business entity. Exempt Income (i. Keoghs. deductible at sole proprietorship. although Depends on tax status as Owner Level may be exempt from FICA sole proprietorship. extreme care must be taken to ensure all federal and state laws are being followed. $3. character is sole proprietorship. shareholders with normal sole proprietorship. Sole Proprietor Partnership C Corporation S Corporation LLC Fringe Benefits . retains income tax. Any retirement plan. must be deductible at corporate corporate level.000.. contributions corporation level passed through to partner and deductible by partner Note: This chart is intended for informational purposes only and may not include all aspects of tax law. Exempt Passed through to Remains exempt for Passed through to Depends on tax status as municipal bond partners. investment received it directly received it directly income. passive. SIMPLEs. capital same as if partner the same as if shareholder partnership. or corporation established at partnership level established at S level. must be partnership. if they are partnership. or corporation nondiscriminatory Capital Losses Deductible by the owner Passed through to Allowed only to the Passed through to Depends on tax status as up to capital gains plus partners with normal extent of capital gains. SIMPLEs. etc. may be shareholders. excess is carried limitations applying at Any net capital loss for limitations applying at partnership. income. See box above See box above Most are tax free Most are taxable. © 2010 National Association of Tax Professionals 4 . retains sole proprietorship. interest) character as exempt subject to AMT character as exempt partnership.e. except Keogh. 401(k). or corporation gains/losses. or corporation Retirement Plans Any retirement plan. solo-401(k) Keoghs. Keogh. or corporation over until death partner level the year is carried back shareholder level three tax years as short- term capital loss then forward five years Income Treatment depends on Passed through to Dividend income when Passed through to Depends on tax status as Characterization income. including SEPs. Any retirement plan Any retirement plan except Depends on tax status as including SEPs. ordinary partners. character is the reported to shareholder shareholders.