If you’re thinking about becoming a business owner, there’s an important decision to make about the entity of your business. Whether for tax purposes or personal preference, it’s wise to know the pros and cons of each business entity type.
Below is a simplified chart of the basic tax entities, and information about each one:
Choosing a Business Entity
| |
Sole Proprietorship |
General Partnership |
Limited Partnership |
C Corporation |
| Limited Liability |
No |
No |
Yes 2 |
Yes |
| Pass-through Tax Treatment 3 |
Yes |
Generally yes |
Generally yes |
No |
| Difficult to Form/Maintain |
No |
Not very |
Not very |
Yes |
| Continuity of Life |
No |
No |
No |
Yes |
| Centralized Management |
Yes |
Generally no, but partners can elect a committee of managers |
Yes |
Yes |
| Interests Freely Sold/Transferred |
Yes 5 |
Generally no |
Generally no |
Yes |
| Available in All States |
Yes |
Yes |
Yes |
Yes |
| Minimum Number of Owners |
One |
Two |
Two |
One |
| |
S Corporation |
Limited Liability Company (LLC) 1 |
Limited Liability Partnership (LLP) |
|
| Limited Liability |
Yes |
Yes |
Yes |
|
| Pass-through Tax Treatment 3 |
Generally yes |
Yes |
Yes |
|
| Difficult to Form/Maintain |
Yes |
Somewhat |
Somewhat |
|
| Continuity of Life |
Yes |
State law may limit LLC life to a set number of years 4 |
No |
|
| Centralized Management |
Yes |
Generally yes, since members can elect a committee of managers |
The partnership agreement can centralize management |
|
| Interests Freely Sold/Transferred |
Not to ineligible S shareholders |
Yes, but transferee often has more limited rights unless all other members approve of a sale/transfer |
No |
|
| Available in All States |
Yes |
Yes |
No |
|
| Minimum Number of Owners |
One |
Generally two |
Two |
|
1 Assumes that the LLC opts for tax treatment as a partnership.
2 Limited liability is available only to the limited partners.
3 In certain circumstances, partnerships and S corporations may be taxed at the entity level.
4 Generally, termination dates for LLCs provided for under state law may be overridden in the LLC agreement.
5 Sole proprietor sells business assets rather than an interest in a business entity.
|
 |
Joan Jackson, Publisher
Author of e-booklets:
~101 Online Financial Calculators Every Entrepreneur (and Everyone!) Needs
~70 Tips – Thrive in Business in Any Economy
