Four Major Business Entity Types
The following is an outline of the tax and other aspects of the four major business and tax entities. This is not presumed to be the whole story but just a sketch of the major characteristics and a basis for further discussion.
Please note that a LLC - Limited Liability Company can be taxed as either a "S" Corporation or a partnership, or sole proprietorship depending on how the agreement is drafted. The LLP - Limited Liability Partnership is taxed as a Partnership. There are no separate tax forms for the LLC or LLP.
|
Sole |
Partnership |
"S" |
"C" |
Net operating income |
Taxed directly to owner on 1040 | Passed through to partners 1040 via form K-1 whether or not distributed | Passed through to shareholders 1040 via form K-1 whether or not distributed | Double tax-once on C Corp., again when paid to shareholder as dividends |
Net operating loss |
Reduces AGI -Can be carried back 2 years and then forward 5 | Passed through to partners 1040 via form K-1 Losses cannot exceed partners basis in Co. | Passed through to shareholders 1040 via form
K-1 - Losses cannot exceed partners basis in Corporation |
Deductible only against income - Losses can be carried back 2 years and forward 15 |
Capital gains |
Taxed to owner | Passed through to partners 1040 via formK-1 | Passed through to shareholders 1040 via form
K-1 |
Gains taxed at regular Corporation rate |
Capital losses |
Offset against capital gains + $3K per year | Passed through to partners 1040 via form K-1 | Passed through to shareholders 1040 via form
K-1 |
Deductible only against Corporation capital gains |
Donations to charities |
Itemized deduction on 1040 | Passed through to partners 1040 via form K-1 | Passed through to shareholders 1040 via form
K-1 |
Limited to 10% of Corporation income (adjusted) |
Dividends received |
Taxed to owner on 1040 | Passed through to partners 1040 via form K-1 | Passed through to shareholders 1040 via form
K-1 |
Can deduct from income 70% of dividends received |
Tax rates |
Based on taxable income: 10% to 35% | At partners individuals tax rate: 10% to 35% | At shareholders individuals tax rate | 15%-to 50K
25%-50K to 75K 34%-75K to 100K |
Fringe benefits |
Partially deductible | Not eligible to receive benefits | Greater than 2% owners cannot receive benefits | No restrictions |
Retirement plans |
Various | Various | Profit sharing or defined contribution plan - no loans | Profit sharing or defined contribution plan - loans allowed |
Sale of ownership |
Capital gain | May be part CG and part ordinary income | Capital gain | Capital gain |
Liquidation |
N/A | N/A | Capital gain or loss to shareholder | Double taxation-First at Corporation level, then for shareholder |
Alternative minimum tax |
26% to 28% ATM | Partnership not subject - preference items passed through | S Corp. not subject - preference items passed through | ATM of 20% at Corporation level |
Payroll tax |
15.3% SE tax - 50% deductible on page 1 of 1040 | Partnership income taxed as SE income on 1040 | Undistributed income is not subject to payroll taxes | Corporation and each employee pay 7.65% of FICA wages |
Items affecting the partners' and shareholders' basis in business |
N/A |
1. income and gains increase - losses decrease 2. capital increases - distributions decrease 3. partners share of liabilities increase basis |
1. income and gains increase - losses decrease 2. capital increases - distributions decrease 3. loans put into the Co. increase basis - share of liabilities do not |
N/A |
Cash vs. Accrual |
Can use either | Can use either unless inventory is a factor | Can use either unless inventory is a factor | Cannot use cash if receipts are $5 million or more or if inventory is a factor |
Splitting of income |
N/A | Allocated according to partnership agreement | Allocated according to shares owned | N/A |
Tax year |
Calendar year | Must use same year as partners | Calendar year, generally | Calendar or fiscal year |
Accumulated earnings tax |
N/A | N/A | N/A - unless S had previously been a C Corporation | Unreasonable earnings above $250K ($150K for PSC) are hit with 39.6% special tax |
Excessive compensation |
N/A | N/A | N/A | If deemed excessive - becomes non-deductible dividend |
Disallowed personal expenses |
Individual tax rate | Partner pays individual tax rate | Shareholder pays individual tax rate | Double taxation - first at Co. level then at shareholder level |
Personal Holding Co. |
N/A | N/A | N/A | Subject to 39.6% tax rate |
Besides the decision regarding the type of business structure that might best suit your venture you may have other forms, etc. that you need to file:
- Internal Revenue Service Form SS-4 in order to obtain a Federal Employer Identification Number (EIN).
- Massachusetts Dept. of Revenue Form TA-1 to obtain a State EIN for withholding, sales and meals tax, or both (if a Massachusetts Corporation).
Our pledge to all our small business clients is to provide personal service at a reasonable price. We are ready to explain the issues - in plain English - and help you make educated decisions regarding your business. We offer a wide array of services to our small business clients. Whether you need help with payroll taxes, business & income taxes, or tax planning, we are on your team to provide Service and Solutions for all your business needs.
