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Business Entity Comparison


Making decisions about legal structure and tax treatment are two interrelated factors that go into choosing a business structure. Even though terms like "an LLC taxed as an S-Corp" may first be intimidating, you'll quickly become fluent in the terms for the most typical legal entities as we’ll be explaining each of them for better understanding.


As a result, today’s post is devoted to assisting you in choosing the ideal structure for your company. You'll be making two independent but connected decisions through this exercise: about the legal framework and the tax treatment. So let's get going.


Before we see the comparison chart, let's quickly explain the 6 business entities shortly.



Types of Business Entities

Below are the types of business entities. Let’s see them one after the other:



1- Sole Proprietorship

The simplest type of corporation is a sole proprietorship, in which the company's owner and operator are one person (or a married couple). If you start a new company and are the only owner, you are legally considered a sole proprietorship. A sole proprietorship doesn't require state registration, but depending on your industry, you might need municipal company licenses or permissions.



2- General Partnership

The main distinction between partnerships and sole proprietorships is that a partnership often includes two or more owners. General partnerships, also known as GPs, and limited partnerships, often known as LPs, are the two types of partnerships. All partners actively manage the company in a general partnership and split the gains and losses.



3- Limited Partnership

A limited partnership, or LP, is a type of registered business entity in contrast to a general partnership. Therefore, you must submit documentation to the state to establish a limited partnership. There are two types of partners in an LP: general partners, who own, run, and are legally responsible for the business; and limited partners, also known as "silent partners," who solely act as investors.



4- C Corporation

A C corporation is a distinct legal body that operates independently from the proprietors of the business. A corporation is governed by its shareholders (the owners), a board of directors, and officers, albeit one individual can play all of these positions in a C corp, allowing you to establish a business where you are in total control.



5- S Corporation

An S corporation is a pass-through organization for tax purposes while still maintaining the limited liability associated with a C corporation. This indicates that an S corp's profits and losses filter through to the owners' tax returns, much like a sole proprietorship or partnership. An S company is not subject to corporate-level taxation.



6- Limited Liability Company (LLC)

The benefits of each of the other business entity categories are incorporated into a limited liability company. LLCs provide limited liability protections, much like corporations do. However, LLCs also require less continuing maintenance, so in that regard, they resemble sole proprietorships and partnerships more.




Business Entity Comparison

The table below compares the 5 major business entities, their features, and structures.



Entity Type

Liability

Taxation

Formation

Corporate Maintenance

Sole Proprietorship

The owner is accountable for company debts individually.

On his or her tax return, the owner discloses any profit or loss.

Easy to make and operate, and inexpensive. No filing is required.

There is no formal corporate upkeep necessary.

General Partnership

Debts incurred by the business are individually borne by the owners.

On their tax forms, the owner (partners) discloses any profit or loss.

Easy to make and run, and inexpensive. No filing is required.

Without involving outside investors in firm management, general partners can raise money.

Limited Partnership

Partnership as long as they refrain from taking on managerial responsibilities, limited partners' culpability for company debts is restricted.

The nature and scope of the return on investment (which is comparable to a dividend) provided to the limited partners by the limited partnership are typically outlined in the partnership agreement.

Suitable primarily for real estate investment companies.


Costlier to establish than a general partnership.

Without involving outside investors in firm management, general partners can raise money.


Personal liability for business obligations for general partners

C corporation

Owners' culpability for commercial loans is constrained.

Owners can pay a lower overall tax rate by dividing corporate profit among themselves and their company.


A distinct taxable entity.


Fringe benefits may be written off as an office expense.

An infinite number of stockholders are permitted.


Therefore, it’s more expensive to set up than a partnership or a sole proprietorship.

Stock shares could be sold to raise money.


To retain corporate status, meetings are necessary.

S Corporation

Owners' culpability for commercial loans is constrained.

On their tax returns, owners disclose their portion of the company's gain or loss.


Owners' income must be distributed following their ownership stakes.


Owners may deduct corporate losses from other sources of income.


For owners who own more than 2% of the shares, fringe benefits are restricted.

It is more expensive to start a corporation than a partnership or a sole proprietorship.

Added formalities are needed compared to a limited liability company with similar benefits.

Limited Liability Company

Combines the liability protection of a corporation with the partnership's pass-through tax structure.

LLCs may now choose to be taxed as a corporation or a partnership under IRS regulations.

This is much more expensive to incur than the sole proprietorship or partnership business

Member interests may be sold following corporate policy.


Much simpler to keep up than a business.

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